Euro versus JPY - a difference in behavior

This is a very good set of chart on some of the problems when comparing the relationship between stock returns and exchange rate returns. They can sometimes be negatively correlated and at other times highly correlated. The stocks cannot tell you what may happen to exchange rates nor can exchange rates tell us about stock returns. You need more information on other factors.

The yen has fallen significantly and its correlation with the Nikkei stock index has been negative. The stock market has been on a nice up move while the yen has been falling. In the case of the euro, the currency has been moving higher and the stock market has also moved higher. The correlation  has been positive and only recently has turned down. Is there a correct relationship between a stock market and the exchange rate? No.

 The common factor is capital flows and the underlying economy. In the case of Europe, money flows have moved back to the region after the sovereign debt crisis. Monetary policy has been marginally tight, so the combination has led to higher exchange rates and an improving stock market. With the ECB calling for looser monetary policy, the correlation has now turned negative. The stock market is still moving higher, but there is the expectation of a weaker Euro. 

In the case of the yen, the QE program has pushed the yen lower and provided liquidity for a robust stock gain. Hence, there was a negative correlation between the two markets. Now that the monetary stimulus is not expected to work as well, there stock market has reversed some of its gains and the exchange rate has stopped its descent.

The common thread in monetary policy. This will drive both markets and tell us about the correlation across these asset classes.