AUDJPY used to be a very good indicator of ‘intermarket correlation’. It clearly tracked Asian stock market indices such as Hang Seng Index, Singapore Index Futures (SiMSCI) and MSCI Emerging Markets Index (EEM). The positive correlation could be due to 2 dynamics:
- AUD tends to do well when Asian economies like China are doing well (think of Australian exports of iron ore, other commodities)
- JPY tended to strengthen due to repatriation when its stock market i.e. Nikkei 225 is not doing well (which also tracks Asian indices).
At the moment AUDJPY has diverged from Hang Seng Index and EEM; a convergence of the three requires 1) strengthening AUDJPY or 2) deflating HSI and EEM.
Strong positive correlation between the three
Chart #1 – EEM, HSI, SiMSCI, China A50 and AUDJPY overlay published on 27 January 2016
- Highs and lows march closely which is a sign of positive correlation.
- Correlation visible as far back as 2011.
- There was one episode of divergence which subsequently converged. This divergence was due to strong Hang Seng Index driven by Shanghai Hong Kong Connect. SHHK commenced on 17 November 2014 and topped/popped in the middle of June 2015.
- There is a divergence at the moment.
AUDJPY, Hang Seng Index, EEM overlay; weekly chart from 2011 – present | Source: Investing.com
Chart #2 – AUDJPY and Nikkei 225 overlay, daily chart from June 2015 – present
- This chart demonstrates the ‘JPY-strengthening’ dynamic due to stock market performance.
- Highs and lows match closely which is a sign of positive correlation.
- Worthwhile to note that from the Jun2 2015 start to present, both has suffered near equal loss – another evidence of their correlation.
AUDJPY – Nikkei 225 overlay, daily chart June 2015 – present | Investing.com
Divergence at moment, stocks rising with falling AUDJPY
Starting some time in July, HSI and EEM strengthened while AUDJPY. Unless their positive correlation (due two dynamics due to mentioned in first paragraph) is no longer valid, expect AUDJPY to strengthen or HSI and EEM to weaken.
AUDJPY HSI EEM overlay; daily chart from January 2016 – present | Source: Investing.com
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Soh Tiong Hum is Director of TerraSeeds Market Technician Pte Ltd. TerraSeeds is a trading educator in Singapore since 2005.
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