Generally, forex traders can get away with not paying too much attention to the stock market. Of course, equities usually move in opposition to currencies, so it’s always a good idea to keep an eye on what’s going on with stocks. And right now, for yen traders, there is an extra reason to pay attention to the Nikkei 225. It may be exhibiting symptoms of a phenomenon that could have a significant impact on Forex trading.
We’re all well aware that AI investment and optimism on enhanced profits in tech from it is driving up stock markets. There has been a lot of focus on the US in particular, with valuations more than doubling the average. Typically, this means the stock market is overbought and ripe for a significant correction. But the Nikkei is even more exposed to tech stocks than the Nasdaq, and it could be showing signs of market exhaustion.
New Records!
The premier stock index in Japan had an unusually robust performance in October, gaining 16% and pushing over the 52K handle. The index made headlines earlier in the year as it surpassed its all-time high set back in the late 1980s. Back then, the Nikkei was driven higher by speculators who inflated Japanese stocks to sky-high valuations, ultimately leading to a massive crash with global implications. The stock market took over forty years to recover.
Now, inventors are examining the similarities with the prior peak and appear to be somewhat concerned. And not just traders. Even the Vice Minister of Finance for Japan stated that he was concerned that AI was driving stocks too high and too fast. Typically, he limits himself to discussing Forex and attempting to prevent the USDJPY from rising too quickly. Following his verbal intervention, the Nikkei tumbled over 4.0%.
What Does This Have to Do With Forex?
While the stock market fell, the yen appreciated. In fact, it was the best-performing major currency last week, despite the dollar also strengthening. This is relevant to market dynamics because the Japanese stock market has attracted significant foreign investment. This means that people must buy yen, which in turn strengthens the currency. A drop in the stock market would typically lead to divestment, and therefore the selling of the yen.
However, this didn’t happen. Traders continued to buy yen, as the BOJ is expected to raise rates in the near future. Possibly as soon as December. There is continued demand for safe havens, but with the US government closed for the shutdown, it seems traders are looking to stash their money in other places. Currently, that appears to be the yen.
Just a Correction?
It’s only been a few days, and there is reason to believe that the moves in the Nikkei and yen were technical in nature. Last week, most major tech companies reported, leading traders into a period of profit-taking and weighing on tech shares worldwide. The Nikkei could resume its upward trajectory in the near future, and the yen could weaken again.
However, if traders remain nervous about the “AI bubble”, they could turn to the yen as a safe-haven play. That could continue to bolster the currency and push the USDJPY towards the 150 handle once again.
