DailyFX - JPY and XAU Correlation

5/11/2014 DailyFX - How the BoJ Action Can Bring Clarity to Gold’s Future

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Tuesday, 04 November 2014 19:00 GMT by Tyler Yell, CMT, Forex Trading Instructor

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How the BoJ Action Can Bring Clarity to Gold’s Future

The inverse correlation of USDJPY & XAUUSD provides clarity that traders can benefit from acknowledging.

Talking Points:

What The Bank of Japan’s Move Means for USDJPY

Correlation Analysis – XAUUSD & USDJPY

XAUUSD Outlook

“The tipping point is that magic moment when an idea, trend, or social behavior crosses a threshold,

tips, and spreads like wildfire.”

― Malcolm Gladwell, The Tipping Point: How Little Things Can Make a Big Difference

USDJPY bears didn’t stand a chance when two critical changes were announced on October 31, 2014. The

first, was the Government Pension Investment Fund or GPIC, the world’s largest pension fund would allow a

larger percentage of the portfolio to be allocated outside of Japan, which will done via selling the JPY so theJPY weakened and USDJPY pushed higher. Secondly, the Bank of Japan or BoJ took massive action by

increasing their QE from ¥60-70T JPY TO ¥80T JPY in order to ensure the inflation target would be hit.

Learn Forex: BoJ lit a fire under USDJPY Bulls



Presented by FXCM’s Marketscope Charts

In effect, the BoJ was looking to enact a tipping point so that JPY would weaken in such a way to encourage

inflation. You can see above that the technical of higher USDJPY align with the wishes of the Bank of Japan.

Now that the two forms of analysis align to favor a weaker JPY we notice another pattern of weaker

XAUUSD. Let’s take a deeper look to see what this could mean moving forward.

Correlation Analysis – XAUUSD & USDJPY

The purpose of looking into correlations is to get a clean view on what direction an asset you’re looking to trade

could possibly move. Correlations can be easily applied to all markets but are very clean in the Forex market

because FX underlies all other asset markets as a pricing mechanism. An important note is that correlation does

not equal causation, which means that because things happen together does not mean that one action specifically

causes another action. This mindset is important so that you do not over rely on correlations just like you

shouldn’t over rely on RSI or moving averages.

You can register for a free online course on Moving Averages here.

Learn Forex: USDJPY (Blue Line) & XAUUSD have an Inverse Correlation


A simple way to apply correlation analysis is to use the ‘Price Overlay’ tool on the Marketscope toolbar. This

will allow you to apply your chosen instrument over the current chart like you see above with USDJPY appliedabove XAUUSD. You can play around with different markets to see a clean correlation. If you notice onemarket moves higher and another market overlaid moves in the opposite direction nearly in tandem, it is known

as an inverse correlation and can still be helpful to your trading like we see on the above chart.

Recommended Reading: How to Use Market Correlations to be Well-Positioned for Big Moves

XAUUSD Outlook

The simple argument of this article is that the inverse correlation of USDJPY & XAUUSD can help you see



what may happen next in one market by identifying a clean trend in the other market. Because the BoJ pushed

JPY lower and USD higher, the outlook for XAUUSD is now favorable for further downside.


Try trading Gold and correlations using a FREE Forex demo account. This will give you an idea of how

price fluctuations affect commodities and currencies while practicing your trading in real time!

In addition to the inverse correlation paving the way for higher USDJPY and lower XAUUSD, we can useanalysis like Elliott Wave to look for further downside levels. Elliott combined common patterns and Fibonacci

to help you see probable outcomes based on prior market outcomes. The already favored downside view ofXAUUSD thanks to USDJPY can turn our view lower to a Fibonacci level of $1,000, which is an extension of

the recent move.

Recommended Reading: How to Understand the Three Building Blocks for Trading Elliott Wave

Happy Trading!

---Written by Tyler Yell, Trading Instructor

To contact Tyler, email [email protected]

To be added to Tyler's e-mail distribution list, please click here

Tyler is available on Twitter @ForexYell

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DailyFX - JPY and XAU Correlation