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How the BoJ Action Can Bring Clarity to Gold’s Future

How the BoJ Action Can Bring Clarity to Gold’s Future

Tyler Yell, CMT, Currency Strategist


Talking Points:

What The Bank of Japan’s Move Means for USDJPY

Correlation Analysis – XAUUSD & USDJPY

XAUUSD Outlook

“The tipping point is that magic moment when an idea, trend, or social behavior crosses a threshold, tips, and spreads like wildfire.”

― Malcolm Gladwell, The Tipping Point: How Little Things Can Make a Big Difference

USDJPY bears didn’t stand a chance when two critical changes were announced on October 31, 2014. The first, was the Government Pension Investment Fund or GPIC, the world’s largest pension fund would allow a larger percentage of the portfolio to be allocated outside of Japan, which will done via selling the JPY so the JPY weakened and USDJPY pushed higher. Secondly, the Bank of Japan or BoJ took massive action by increasing their QE from ¥60-70T JPY TO ¥80T JPY in order to ensure the inflation target would be hit.

Learn Forex: BoJ lit a fire under USDJPY Bulls

Presented by FXCM’s Marketscope Charts

In effect, the BoJ was looking to enact a tipping point so that JPY would weaken in such a way to encourage inflation. You can see above that the technical of higher USDJPY align with the wishes of the Bank of Japan. Now that the two forms of analysis align to favor a weaker JPY we notice another pattern of weaker XAUUSD. Let’s take a deeper look to see what this could mean moving forward.

Correlation Analysis – XAUUSD & USDJPY

The purpose of looking into correlations is to get a clean view on what direction an asset you’re looking to trade could possibly move. Correlations can be easily applied to all markets but are very clean in the Forex market because FX underlies all other asset markets as a pricing mechanism. An important note is that correlation does not equal causation, which means that because things happen together does not mean that one action specifically causes another action. This mindset is important so that you do not over rely on correlations just like you shouldn’t over rely on RSI or moving averages.

You can register for a free online course on Moving Averages here.

Learn Forex: USDJPY (Blue Line) & XAUUSD have an Inverse Correlation

Presented by FXCM’s Marketscope Charts

A simple way to apply correlation analysis is to use the ‘Price Overlay’ tool on the Marketscope toolbar. This will allow you to apply your chosen instrument over the current chart like you see above with USDJPY applied above XAUUSD. You can play around with different markets to see a clean correlation. If you notice one market moves higher and another market overlaid moves in the opposite direction nearly in tandem, it is known as an inverse correlation and can still be helpful to your trading like we see on the above chart.

Recommended Reading: How to Use Market Correlations to be Well-Positioned for Big Moves

XAUUSD Outlook

The simple argument of this article is that the inverse correlation of USDJPY & XAUUSD can help you see what may happen next in one market by identifying a clean trend in the other market. Because the BoJ pushed JPY lower and USD higher, the outlook for XAUUSD is now favorable for further downside.

Presented by FXCM’s Marketscope Charts

Try trading Gold and correlations using a FREE Forex demo account. This will give you an idea of how price fluctuations affect commodities and currencies while practicing your trading in real time!

In addition to the inverse correlation paving the way for higher USDJPY and lower XAUUSD, we can use analysis like Elliott Wave to look for further downside levels. Elliott combined common patterns and Fibonacci to help you see probable outcomes based on prior market outcomes. The already favored downside view of XAUUSD thanks to USDJPY can turn our view lower to a Fibonacci level of $1,000, which is an extension of the recent move.

Recommended Reading: How to Understand the Three Building Blocks for Trading Elliott Wave

Happy Trading!

---Written by Tyler Yell, Trading Instructor

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Tyler is available on Twitter @ ForexYell

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.