The correlation
between the Nikkei and JPY/USD over the past 12 months is +61%.
Both rallied in 2003 and then took a long rest in 2004, lulling
many investors to sleep.
Yet given that both the Nikkei and the yen appear to be in
bullish consolidation patterns, a
sustained breakout in the Nikkei above downtrend resistance at
11,200 may prompt JPY/USD to break above 1.05 (USD/JPY below
109.50).
In turn, Japanese iShares (EWJ) would stand to benefit US
investors from the capital appreciation in both Japanese
equities and the yen when translated into dollars. Today’s
move in EWJ above $10 may be evidence of a breakout targeting
$11 to $12.
In addition, US stocks have traditionally had a high correlation
with the Nikkei. Over the past 5 years the NASDAQ composite has
had a 92% correlation with the Nikkei on a weekly basis. It has
fallen to 75% over the past 3 years. But a bullish bet on Japan
may be on hedge fund managers’ horizon.
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