Craig Atkinson

I read every morning a free currency market analysis from Jack Crooks at Black Swan Trading. Today he reported on an interesting relationship between the Nikkei Index and the US Dollar. His idea actually solves a major conundrum that had been puzzling me lately because it is counter-intuitive until it hits you.

Basically it comes down to this:

1. The biggest 225 public companies in Japan that are actively traded are export dependent with their biggest market in the United States.

2. When the US Dollar gets stronger, the Japanese Yen gets weaker.

3. The US Dollar is getting stronger right now primarily because the Federal Reserve has been very hawkish on raising interest rates and they have been following a sustained and widely expected path of moderate tightening.

4. The Bank of Japan has had the lowest interest rates in the entire world for an extended period of time and are not widely expected to change that going forward 6 months to a year.

5. Thus you can make easy money by going long USD against JPY as you earn the carry. It’s the interest differential between what you borrow the money for and what you lend it back.

6. So the market is buying US Dollars and selling Yen. Thus the US Dollar is getting strong and the Yen is getting weak.

7. This helps the biggest exporting companies in Japan because their market for products is getting a currency ‘discount’ on Japanese produc ts. So they can lower their prices a bit and stimulate demand, or they can just leave their prices the same and earn more money when converted to Yen.

I was puzzled in recent weeks as the Nikkei Index broke through 15,000 to 3+ year highs and the JPY hit a 2+ year low.

Nikkei 225 Index

USDJPY

But it all makes perfect sense now!