Intraday Correlations: CAD/JPY Vs. S&P 500

Whether you’re an experienced trader or brand new to Forex, you should be aware of the strong positive correlation between U.S. Equities and CAD/JPY. This historical intermarket relationship is predominantly due to the fact that the loonie is considered a “high beta/commodity” currency, while the yen has been known as the classic “carry” currency.

Since Japan’s interest rates have been low for several decades, it has made it an attractive currency to borrow in and then turn around and invest that money into currencies which have a higher yield. Consequently, when pairing the two currencies together, we tend to see CAD/JPY trade roughly in-line with other major “risk markets,” namely U.S. equities (ideally because Canada has strong trading ties with the United States).

Often I find an intra-day overlay helps ease the transition for experienced traders (in these alternative markets) into the world of FX or simply help newer traders formulate a view based upon a market which they may already feel opinionated about.

While most analysts cite this relationship over the long-term (see carry trade above), there has been an even stronger intraday relationship between the two of late. The chart below depicts CAD/JPY vs. S&P500 futures since 17:00pm ET (yesterday) and as you can see the two are nearly identical (Correlation = 0.8993). Now, this doesn’t guarantee if the S&P500 continues to head higher over the coming days that CAD/JPY must trade higher as well (or vice versa), but it does suggest this should be the relationship between the two.

Thus, if you have an opinion on the direction of U.S. equity markets over the coming days/weeks or even intra-day, CAD/JPY could be a vehicle you may want to consider to express that view. Technically speaking, keep an eye on the 79.00/10 level in CAD/JPY over the next few sessions as it sees the convergence of the top of the daily Ichimoku Cloud as well as the 55 and 200-day sma’s.
Chart Source: Bloomberg, FOREX.com

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