Forex Investment and Currency Trading

In the current environment of deleveraging, the once funding currencies of carry trades are staging an impressive comeback. This is particularly the case with the JPY. The 3-month correlation between EUR-USD and USD-JPY is now at +0.25 compared to a 6-month correlation of -0.04. This suggests that the JPY and the EUR are now moving in opposite directions and it is even clearer when one compares the JPY to the AUD. The 3-month correlation between AUD-USD and JPY-USD is at +0.68 compared to a 6-month correlation of +0.50. It is interesting to note that earlier this year these correlations were very similar, but for exactly the opposite reasons. The JPY was moving in opposite
direction than other major currencies then because it was used as a funding currency for carry trades, putting the currency under pressure. This time around, the correlations are similar, but the trends are exactly the opposite. Fear and volatility benefit the JPY and to a lesser extent the CHF and this is also reflected by the correlations between the VIX index and the two currencies. The correlations show that most currencies come under pressure as volatility rises, with the two only exceptions being the JPY and the CHF.