EURJPY-Proxy for RISK

Take a good look at the 2 charts presented here.

They look eerily similar. But the chart on the botton is of the EURJPY, while the one on top represents the ETF of the DIAMONDS (DIA), which tracks the Dow Jones Industrial Average. But why is this so? It is because these two were twins at birth? This is because the EURJPY is currently now the poster boy for carry trades, making it a proxy for risk. As the stock market goes up, risk taking increases, and investors borrow yen to get high returns. Conversely, when the stock market goes down, investors liquidate their yen borrowings, sending the EURJPY down.

So another way of playing the Forex Markets (and Stock Markets) is too look at the Dow Jones Industrial Average (DJIA) and base your trades in EURJPY on the direction of the DJIA. So if you think that the DJIA is going to have its end of the year rally and January effect early 2008, then long the EURJPY. If you think we’re going to have correction (prior to moving up), the go short.

Chief Shook