- Correlation with vol On average, movements in JPY have been more tightly correlated with those from VIX than any major currency over the past two months. This supports the view that financial turmoil and attendant volatility have been the decisive factors in driving JPY, as investors have become concerned with potential for a reversal of carry trade in the face of widespread deleveraging.
- Poor domestic fundamentals Japanese fundamentals are grim, but this spells further JPY appreciation. The epicenter of credit woes sits outside Japan, but reliance upon net exports for growth points to shaky prospects. The BoJ is likely to acknowledge this in its post-policy meeting press conference today.
- A long way already Still, spot JPY has significantly unwound previous rises. USDJPY traded to its lowest level since March, while AUDJPY reached its lowest level in more than five years –
having declined by more than 40% in the past two-months. Given this backdrop, the latest bout of JPY strength may be more reflective of a ‘psychological’ impact than it is of actual unwinding
of short -JPY positions. - Buy on weakness This argues for some caution in chasing JPY higher. Positioning may be less conducive to sharp JPY rises if risk averse global investors are slow to adopt more outright JPY
longs and there may be vulnerability for pullbacks. Such pullbacks would represent a JPY buying opportunity as any perceived improvement in the financial backdrop is unlikely to last. - A world of fear Interestingly, short-dated implied volatility has begun to outstrip actual volatility. This supports the view that investor ‘fear’ is beginning to outpace the facts on the ground, as markets are pricing in more of a risk premium than appears warranted by spot moves. This means that there is more vulnerability for a temporary reversal.
- Favourite USDJPY overlay has been the equally weighted index of U.S. 2 year yields and the S&P500. With on going ST weakness in both yields and stocks, the equally weighted index has fallen through support levels including the one form March ’07. This now argues for a lower USDJPY to test 100.03 and a breach of that suggests a test of the March low at 95.77 again.
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October 7th, 2008 · No Comments
Tags: USDJPY
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