The positive correlation between the Nikkei 225 and USD/JPY has broken down, but with any luck this will return soon and for the USD/JPY to play catch-up with the Nikkei.
SUMMARY:
- Near-term bias is bullish above 101.80 - 102, to target 102.40 / 60
- W1 bias is neutral but expecting bullish breakout and for positive correlation with Nikkie to return
- Break above sloping resistance form 2013 and / or 103 required to confirm bullish breakout on W1
Correlations between markets do break down, but then once they do we can be on guard to see when they return again. The chart above is a 20-week correlation between the Nikkei 225 and USD/JPY with +1 being positively correlation, -1 negatively correlated and 0 having no correlation at all. The 20-week correlation has just dipped below 0, but a cursory glance shows that it does spend a considerable amount of time closer to +1 (so positively correlated) and tends to hang around 0 for too long.
At this stage we do not know if the correlation will spring back to +1 like it did near the end of 2013 or move towards an inversely correlated relationship like it did back in 2012 (over opposite direction). So to help here we can just return to the USD/JPY, knowing that the Nikkei has enjoyed a more bullish structure as of late.
But, as always, it is all about the timing. We have seen this repeatedly when the USD/JPY appears on the verge of a new breakout and subsequent trend, only to see it recycle within the stubbornly sideways correction and whipsaw around. Therefor whilst I suspect we shall return to the primary bullish trend over the coming weeks/month I still prefer to keep this pair for intraday setups until a cleaner signal has occurred.
Looking at the intraday charts we can see the positive effect that US jobs data had on the USD/JPY and now hovers well above 102 support zone. It also appears that the June 30th low is structural and part of a new bullish phase from the May 21st low. Tis favours further upside for the near-term and I am considering bullish setups above 102 to target 102.40 and 102.60.
Here we meet a descending trendline form the 2013 highs (yet to be confirmed) but a break above here could be a much stronger signal that the USD/JPY is finally returning to the bullish phase and for the positive correlation with Nikkei 225 to return.