USD/JPY Intermarket – Gold rally suggests more losses ahead

Gold, a traditional safe haven asset and Japanese Yen, a funding currency and a safe haven asset have been tightly correlated if we view their action on a larger time frames.

For example on the monthly time frame, we see that gold and USD/JPY have been following each other closely in the post GFC world. USD/JPY bottomed out (Yen topped out) at 75.565 in October 2011, while Gold topped out at $1920.80 in September 2011.

Fast forward by four years and what we see is - USD/JPY topped out (Yen bottomed out) 125.856 in June 2015, while Gold bottomed out at $1046.23 in December 2015.

USD/JPY topped out at least six months ahead of gold as markets had slowly started realizing the BOJ is nearing exhaustion, while gold continued to drift lower till Dec on Fed rate hike bets.

Gold being most sensitive to Fed rate hike bets and central bank easing is the first beneficiary of broad based USD weakness/strength and thus is likely to act as a lead indicator for Yen now that BOJ exhaustion is crystal clear now, hence there is little reason for a lag or lead in Yen.