Is USD/JPY Correlated to the S&P 500 Index?

10/27/2010 12:01 am EST

Focus: FOREX

Corey Rosenbloom

Founder and President, Afraid to Trade

File this under “In case you missed it;” the US dollar hit a new 15-year low yesterday morning and held under or around that zone for the remainder of the trading session.

Let’s take a look at the monthly USD/JPY (US dollar/Japanese yen) monthly chart, see the break to the new low, and then compare that forex pair to the 15-year ups and downs of the S&P 500 to find a correlation…if one exists.

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This is just a simple, no-thrills price chart with a couple of trend lines added to highlight a descending triangle long-term potential price pattern.

If you look closely, you can also see a multi-year head-and-shoulders price pattern from 2001 to 2004, which officially achieved its downside price projection target in 2008.

The 100 level was critical multi-year support starting with the end of 1999 and carrying forward almost ten years until the breakdown in 2008.

An initial “test-break” occurred in early 2008 with the final and official break triggering in late 2008 during the heart of the financial crisis.

Remember, this forex pair starts with the US dollar (unlike, say, the EUR/USD pair), so a rising trend indicates a stronger dollar against the yen, while a falling chart represents a weaker dollar against the yen.

And just to flip the terms around, a rising trend represents a weakening Japanese yen against the dollar, just as a falling trend represents a stronger yen against the dollar.

The main idea is that price broke 15-year support, which is a significant development, and the explanations mostly focus on the Federal Reserve’s expected quantitative easing (QE2) policies.

The April 1995 chart low was 81.120, and the new low—so far—is 80.406.

While there’s quite a few lessons to learn just in the price chart above, specifically with respect to price patterns and long-term support levels (breaking), let’s now switch gears to see what the relationship is between this forex pair and the S&P 500.

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As far as I can tell with a quick price chart glance, there is no major meaningful correlation between the pair and the S&P 500.

When the pair bottomed in 1996, the S&P 500 embarked on a massive bull run from 500 to 1,500. The pair peaked in August 1998 ahead of the stock market peak in 2000.

Strangely enough, the pair bottomed in 2000 at the market’s peak.

Then, the pair made only a slight swing high at the market’s bottom in 2002 and chopped aimlessly while the S&P 500 doubled in value from the 750 level to the 1,570 level in 2007.

The pair declined through most of the 2008 selloff and continued declining through the strong 2009 rally into the present.

Correct me if I’m wrong, but I see no major positive or negative correlation between the USD/JPY pair and the S&P 500.

So, while the forex pair has hit a new 15-year low, it’s not as easy to draw a correlation to what may happen next in stocks.

In general, or at least in the current environment, a falling dollar is a generally good sign for stocks.

Anyway, I wanted to share these charts and call your attention to these developments, although the excitement may be contained mostly to the forex trading community.

By Corey Rosenbloom, trader and blogger,
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