"USDJPY and Gold Correlation" by trader vmanena — published June 24, — TradingView
May 28, Learn more about the USD/JPY relationship, wherein the yen can be partially explained in terms of Treasury bonds. May 1, Since the end of , the chart of gold prices in USD looks like a mirror image to the USD/JPY exchange rate. The often-proposed explanation. Feb 20, As more and more evidence shows a significant and increasing relationship between the U.S. dollar, the Japanese yen, and the price of gold.
As seen in the graph below, the blue call-out in the bottom right shows that sincethe yen and gold have more or less acted as the same asset class. Recent evidence leads us to believe that this relationship is set to break. A Closer Look at the Ratio Taking a look at the price action experienced since allows us to take a good look at the process that is set to begin.
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Whenever we conduct technical analysis such as this, the key is this: After the fall experienced in the last few weeks, the ratio is now testing the lower boundary, seen in blue, of the 7-year pattern exactly. It is a good idea to expect the last bounce that could last as long as six months, shown with the green arrows above, with yen priced in gold sharply decreasing afterward.
An Impeding Yen Decrease Due to the impending decrease, we will see the yen lose a large amount of value as it is priced in gold. More importantly, however, is that it will bring an end to the seven-year relationship that the two asset classes have shared since Their relationship has led traders to see the two within the same asset class, but with this new information, they will be forced to consider them separately. Generally, choices like this are made based on momentum, leading us to believe that they will follow gold instead of the declining yen.
Prepared investors are getting ready by selling their yen and buying up gold, as observed by taking a look at the charts. Main Factors of this Movement Our research shows two main factors behind the change out of yen into gold: Z Yen The yen is the currency of Japan, officially adopted in The currency is managed by the Bank of Japanbased in Tokyo. Just like the U. Since it is a currency of one of the largest economies in the world, the yen is used as a reserve currency along with the U.
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It is also the third most traded currency in the foreign exchange market, after the greenback and the euro. Indeed, it is the second most widely held currency, after the U. Yen and Gold The yen is one of the most important alternatives to the U. This is why there is often a positive link between the yen and gold: However, the relationship is not a perfect correlation, as one can see in the chart below.
The results are shown in Figures 3 and 4. Figure 3 shows how close the JPY has moved with changes in the real-interest rate expectation differentials since early Coincidentally, that is also the period for which gold and the JPY have moved in like a mirror image. Importantly, the yen follows broadly changes in real interest rate expectation differentials over the long run as well as shown in figure 4.
However, over this prolonged period, gold prices were not just driven by changes in real interest rate expectations but also by large swings in longerdated energy prices and other central bank policy such as several rounds of QE. Hence gold did not trade in line with the yen.
The question then is, why does the yen react to changes in relative real-interest rate expectations? One possible explanation is that relative changes in real-interest expectations of two currencies affect the respective carry trades. In a carry trade, an investor borrows in one currency with low rates and invests in fixed income securities in another currency with higher rates. In efficient markets, carry trades should not work.
Japanese interest rates have been depressed for decades compared to rates in the US and most other western economies. Sincethe average yield on a Japanese 10 year government bond was 2.
However, this higher yield came with a higher inflation rate. In Japan it was 0. Changes in real interest-rate expectations should influence carry trade investors as it reflects the markets view on how profitable their position will be going forward. Hence, when the real-interest rate differential between two currencies changes, this should have an impact trading positions and thus demand and supply of the involved currencies. Absent any other drivers, this leads to corresponding changes in the exchange rates.
However, absent any other driver is key to this observation. The yen only trades in line with real-interest rate differential as long as there are no other forces at work and the same is true for gold. Gold trades exactly in line with real interest-rate expectations as long as the other drivers that impact gold prices are stable. When for example longer dated energy prices move, as it happened ingold is driven by several factors.