By: Christopher Lewis
The EUR/JPY pair rose during the larger part of the session on Tuesday as traders attempted to rally the riskier assets around the world. However, the long standing correlation between the S&P500 and this pair broke down a while ago, and it looks as if only a certain amount of traders don’t know this.
It used to be that the EUR/JPY would typically rise with the S&P500, as both are a sign of risk appetite. In general, if you are willing to buy stocks, you feel the economic outlook is fairly good and that the riskier assets, such as bonds – especially JGB’s (Japan) aren’t as attractive as you can get a higher yield in other parts of the world. Even though the carry trade dies a couple of years ago, many large institutions still borrow money in Yen in order to take advantage of ultra-low interest rates to make money elsewhere in the world. As the markets become more attractive, that Yen is then converted into other currencies like the Euro.
However, during the session that saw a rise in risk assets – the Euro fell in the end. This is symptomatic of a currency that has far too many issues to make it attractive overall under any circumstance. When there are serious concerns about whether or not the currency even exists in a few years, a few basis points on a bond suddenly don’t look as attractive.
Rise, Then Fall
The pair rose in the earlier hours, but once the markets were in full swing, many people were simply waiting for the Euro to rise in order to sell it against almost anything out there. This included the Yen of course, and the pair was always going to fall. The 98 level began the area of resistance that attracted so many sellers, and at the end of the day we saw a shooting star as a result.
The pair has traced the 20 day EMA (red) for some time now, and the 20 and 50 day EMAs have a nice slope to them that shows continued downward momentum. With this in mind, a break of the Tuesday session lows would signal more selling, and the 20 day EMA could also be used as a form of dynamic resistance in order to sell this market again. I would not buy this pair under any circumstance at the moment.