GBPJPY A Proxy For U.S. Equities?

by on May 15, 2013 4:56 am BST

The investment pool is starting to overflow with nearly every central bank indulging in quantitative easing. As Japan cannonball’s into the deep-end, the European Central Bank (ECB) is starting to dip it’s toe into the shallow side in the face of months of horrendous economic data and less than stellar data from Germany. Regardless, the liquidity around the world is providing equities with a gigantic boost, but are there other ways to trade the equities rally?

For many smaller retail traders, the U.S. index futures can become difficult to trade meaningfully in regards to a margin standpoint. So, it is important for traders to search for new and clever ways to outperform the market. It is also very important for traders to realize that currencies are, indeed, an asset class and be an important holding, but I digress.

For instance, take an overlaying chart of the GBPJPY (British Pound/Japanese yen) and the U.S. indexes. We can notice that the GBPJPY is almost a proxy for U.S. indexes. It can be possible to trade this currency pair versus index futures and potentially outperform the benchmark due to the volatility of GBPJPY.

GBPJPY is currently in an upward channel but has bounced off the top trend line with 156.74 hitting some resistance. The RSI is receding from an overextended position and trending down. GBPJPY is currently trading below it’s daily pivot (156.45 as I write this) that could provide short-term resistance with support at 155.1 and 154.48.

There are a few hours until the German GDP and UK Claimant Count data, and this could provide opportunities for positioning while keeping in mind the equities correlation. If data disappoints, any pullbacks to support levels may provide opportunities to buy as the yen still remains bearish and equities remain bullish (for now). It is possible that the U.S. indexes will brush off the data and that GBPJPY and the U.S. indexes continue upward.

Although, it may be prudent to await Prime Minister Shinzo Abe’s announcement at the G8 Summit this Friday to reevaluate the yen direction. Also, the Claimant Count data will impact the pair more so than the German data. It is wise to wait for the price action to settle if numbers vary from forecasts.

The S&P is up nearly 20 percent with the DOW closely behind, up 18 percent. GBPJPY is up 25 percent with a year end target of 163.