The Euro / Yen cross rate has been an interesting indicator for other financial markets and risk appetite for the past years. This rate measures how many Yen you get for a Euro-when the cross moves higher, the Euro is strengthening versus the Yen; vice versa when it goes lower.
This cross is important because of the “carry trade”. The carry trade results from the low interest rate environment in Japan. Their low rates make it cheap to borrow funds in Yen; these borrowed funds are then used for other investments in riskier assets.
Given this risk relationship, we should tend to see this cross strengthen when traders are looking to increase their exposure to riskier assets; it should fall as risk tolerance falls. The chart below is a weekly chart of the Euro/Yen cross and the S&P 500. The cross is the black line; the S&P is the red bar chart. Note that there has been a good correlation between the two instruments dating back to 2007.
Correlation?
Moving down to the daily chart of the Euro/Yen cross below, the cross topped last Friday at 1.38. This was the third time up to resistance at 1.38, and a flattish version of a “three pushes” formation.
More downside?
So what’s the cross telling us now? If the correlation holds, we should look for the move down the risk scale to continue. This would argue for a higher Dollar and Treasuries, and weaker equities and commodities. Longer term charts of the cross don’t yet show the same toppy formations, so it’s too early to know how big a correction might be. On the other side, a rally and push through 1.38 in the cross would argue for higher equities and commodities, and a lower Dollar.
This is a sample of the analysis from my Swing Trader’s Insight advisory service. For information on STI, and to sign up for a free two week trial, visit here.
The information contained here includes information from sources believed to be reliable and accurate, but no guarantee is made as to accuracy, nor do they purport to be complete. Opinions are subject to change without notice. Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.
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