Forex Investment and Currency Trading

A trend that has started to unfold in the FX markets in the past couple of weeks; the JPY is losing its lustre as a “safe haven” in times of equity market weakness.  The correlation between the S&P 500 and USD/JPY has dropped significantly since the start of the month, weakening to a more or less equivocal +56% and while the EUR/JPY correlation remains strong at +78%, the trend is clearly weakening (the relationship’s tightness peaked at +97% in early December).
While EUR/JPY has maintained a generally strong, positive correlation with equities over the past 18 months or so, there have [...]

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Correlation between equity markets and USD/JPY (and EUR/JPY, NZD/JPY, GBP/JPY) has broken down completely which has led…
To the leverage community covering their short USD vs. JPY positions which has pushed USD/JPY above 92.00 and may target 94.00 (very key resistance)
The volatility skew is collapsing as well.  At one point last week, a 6 month, 25 delta JPY Call Option was 8 vols more expensive than a 25 delta JPY Put Option…that is now down to 4 vols.  A huge collapse…
NO ONE THINKS WE ARE GOING TO 85 anymore…

What happened to the locals…

We were seeing strong flows from the Japanese community [...]

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The financial turmoil and the associated unwind of the carry trade has resulted in a stellar outperformance of the JPY, much of it coming in the past 6 months. On a trade-weighed basis (TWI), the Yen has appreciated by 40% since last summer, outstripping the performance of its regional piers. The CNY has also been relatively strong, but appreciated by only 15% on a TWI basis, and the rest of the G3, the Euro and USD have only appreciated by 5-6% over the same period. Finally, the other big funding currency, the CHF has only appreciated by 11%.
The performance of [...]

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After the sell-off of risky assets last week, FX markets were much calmer this week. However, it feels as if market participants viewed this as a temporary lull in the conflict rather than a proper ceasefire, let alone the end of the war. Equities have recovered somewhat, though in a far from convincing way, but commodities have largely moved sideways and the macro data have remained dire, exemplified by today’s US numbers, all of which surprised the market to the downside. The relative calm was associated in G10 FX with some of the recent underperforming currencies doing well. The CAD [...]

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