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#1 21-12-2020 10:32:21

Admin & Trader
From: Paris - France
Registered: 21-12-2009
Posts: 3068

USD/JPY: a slow decline this year

USD/JPY: a slow decline this year

One of the most interesting currency pairs on the currency dashboard had a strange year in 2020. Once again, investors flew to the safety of the Japanese yen (JPY) - a safe haven currency, just like the Swiss franc (CHF).

However, after the stock market crash of March, the USD/JPY pair decoupled from the general risk sentiment, frustrating both bulls and bears. Of all the JPY pairs, the USD/JPY is the most relevant for the simple reason that it has the global reserve currency (the USD) in its component.

The proverbial correlation with U.S. equities has ended

Most traders are familiar with one of the oldest correlations in the financial markets, that between the USD/JPY and the US stock market. A positive correlation means that both markets move in the same direction - when one is up, the other follows. Unsurprisingly, the U.S. stock market leads and the USD/JPY follows.

The maximum level of a positive correlation is 1 - meaning that both of these markets move together. The lower the level of correlation, the more the two markets decouple.

Look at the above chart. From left to right, equities fell sharply in March. This is the fastest drop in history from a bull market to a bear market. Naturally, the USD/JPY pair followed, as explained by the correlation explained above.

However, at the same time the USD strengthened in all areas - EUR/USD, AUD/USD, GBP/USD all fell dramatically. Yet the yen remained at a high level, defying the trend of the dollar.

After that, equities rebounded. The rebound was so strong that the Nasdaq 100 index reached a new record shortly. The USD/JPY followed religiously - and then something happened.

The stock market's rebound from the lows triggered a rebound in the above mentioned pairs as well - EUR/USD, AUD/USD, GBP/USD. The dollar fell so sharply that the correlation between the USD/JPY and the stock market broke. As a result, the fall of the dollar became visible in the USD/JPY pair as well.

Fast forward to right now, and the USD is on its knees. The EUR/USD pair is at its yearly high - as is the AUD/USD and even the GBP/USD (the Brexit is still a big unknown).

As for the USD/JPY, it crossed the 103 mark last week. Although below the downtrend line, it will continue to press to reach the magic 100 level - a level last visited before Trump's glorious election.

"Anything worth having is worth going for - all the way." - J.R. Ewing



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