One of the most interesting currency pairs of the FX dashboard has a curious 2020. Once again, investors flew for the safety of the Japanese Yen (JPY) – a safe-haven currency, just like the Swiss Franc (CHF).
However, after the March 2020 stock market rout, the USDJPY pair decoupled from the general risk-on/risk-off sentiment, frustrating both bulls and bears. Out of all JPY pairs, this is the most relevant one for the simple reason that it has the world’s reserve currency (the U.S. dollar – USD) in its componence.
The Proverbial Correlation with U.S. Stocks Ended
Most investors are familiar with one of the oldest correlations in financial markets – the one between the USDJPY and the U.S. stock market. A positive correlation, the two markets move in the same direction – when one is rising, the other one follows. Unsurprisingly, the U.S. stock market leads, and the USDJPY follows.
The maximum level of a positive correlation is 1 – meaning the two markets travel together. The lower the correlation level becomes, the more the two markets decouple.
Focus on the chart above. From left to right, the stocks declined abruptly in March this year. It was the fastest drop from a bull to bear market in history. Naturally, the USDJPY followed, as per the correlation explained earlier.
However, at the same time, the USD strengthened across the board – the EURUSD, AUDUSD, GBPUSD, they all fell dramatically. Yet, the JPY held strong, defying the USD trend.
Then the stocks bounced. So strong was the bounce that the Nasdaq 100 index made a new all-time high shortly. The USDJPY followed religiously – and then something happened.
The stock market bounce from the lows triggered a rebound in the pairs mentioned above too – EURUSD, AUDUSD, GBPUSD. The USD declined so abruptly that the correlation between the USDJPY and the stock market broke. Hence, the USD decline became visible on the USDJPY pair as well.
Fast forward to December 2020, and the USD is on its knees. The EURUSD sits at 2020 highs – and so does the AUDUSD or even the GBPUSD (Brexit is still a big unknown).
As for the USDJPY, it broke below the 103 level yesterday. While below the falling trendline, it will continue to pressure to the magical 100 level – a level last visited four years ago before Trump’s election.