How to Use EUR/JPY as a Leading Indicator for Stocks
EUR/JPY seems to be highly correlated with stock markets across the globe.
You should know that the yen, along with the U.S. dollar, is considered to be a safe haven amongst the major currencies.
Whenever confidence in the global economy is down and traders are fearful, we typically see traders take their money out of the stock markets, which leads to a drop in the values of the DAX and S&P500.
With money flowing out of these markets, we usually see EUR/JPY fall as traders run for cover.
On the flip side, when the sun is bright and risk appetite is rampant, investors pour their money into stock markets, which in turn leads to a rise in the EUR/JPY.
The correlation seems to have held well this past decade, as EUR/JPY and both indexes rose steadily together, until 2008 when we were hit with the Grear Financial Crisis (GFC).
In late 2007, EUR/JPY had hit its peak, and so did the stock indexes.
Intermarket analysis studies the relationships between asset classes, typically currencies, bonds, commodities, and stocks.
It can help traders generate broader trading ideas, reveal potential market turning points, or confirm other analysis methods.
The price action of currencies is often driven by their relationship with commodities, bonds, and stock indices.
For example, here are some traditional Intermarket relationships:
A falling U.S. dollar is viewed as positive for commodities prices, while a rising U.S. dollar is considered negative for commodities prices.
Falling bond prices/rising interest rates tend to be negative for stocks while rising bond prices/falling interest rates are normally good for stocks,
Rising commodities prices are historically a sign of economic growth which is good for the stock market and negative for bond prices.