Nikkei Tests 8-Month Uptrend - What Does It Mean For The Yen?

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Includes: EWJ, FXY
by: Marc Chandler
Summary

The Nikkei's uptrend is being tested.

Nikkei and dollar-yen move typically move in the same direction, but magnitudes vary.

BOJ, pension funds and now Japanese corporates are the main buyers of Japanese shares, after foreigners slowed their accumulation.

This Great Graphic, created on Bloomberg, shows the Nikkei's uptrend since last October. It bottomed shortly before the Bank of Japan surprised the market by raising its QE target to JPY80 trillion from JPY60 trillion a year on the basis of a 5-4 vote.

The trendline was tested last week when the Nikkei approached 20000. It was the fourth point of the trend line. It comes in near 20150 tomorrow and 20257 at the end of the week. Although it closed lower on the day, it finished near session highs earlier today.

It is worth considering who is buying Japanese shares. As part of its QE, the BOJ is buying Japanese equities via a number of ETFs. Japanese pension funds diversifying away from Japanese government bonds toward equities and foreign assets. Japanese companies, awash with cash, have also indicated a new willingness to buy back their shares. Foreigners had been significant buyers in April but have since moderated their pace. In April, the weekly purchase by foreigners averaged JPY874 bln. As of the first week in June, the weekly average over the past four weeks is a little lower than JPY400 bln.

The Nikkei and dollar-yen tend to move in the same direction. Over the past 100 sessions, they have moved in the same direction almost three-quarters of the time. From late November 2014 through mid-March, the directional correlation was above 0.90. In terms of the more robust calculations, conducting the correlations on the basis of the percentage change in the Nikkei and dollar-yen, the correlation stands just below 0.19 over the past 60 sessions. It slipped to slight negative territory in April. It did rise briefly above last year's high in late-January, but did not surpass 0.50.

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