29 Oct 2013
Flash: Yen correlations are breaking down - ANZ
FXstreet.com (Barcelona) - The correlation between USD/JPY and the Nikkei is changing, notes Richard Yetsenga, FX Strategist at ANZ.
Key Quotes
"While the correlation in changes remains quite strong; in fact, at around 45%, the correlation is at cyclical highs, and in line with the highest readings of the last 25 years, the correlation of levels, however, has been coming off sharply. The correlation of levels is at its lows for the year, and the lowest since Abenomics became a realistic prospect in November 2013."
"Taking these facts together suggests that USD/JPY and the Nikkei still track each other, directionally, on a day-to-day basis – ie when one goes up over the day, the other is likely to do the same. But the decline in the levels correlation implies that the size of the two moves is no longer comparable – ie the Nikkei may rise a lot, but USD/JPY may only rise a touch."
"The broad conclusion to be taken here is that the domestic drivers of USD/JPY have become less important relative to external drivers. Certainly this fits with a number of measures that we have presented previously – such as the evidence that USD/JPY has fully accounted for the rise in the BoJ’s balance sheet and the rise in inflation expectations."
"This suggest that investors should de-weight Abenomics, relative to some more traditional external drivers of USD/JPY;
particularly the path of Fed policy. This further implies that USD/JPY will continue to struggle, until US bond yields turn higher."
Key Quotes
"While the correlation in changes remains quite strong; in fact, at around 45%, the correlation is at cyclical highs, and in line with the highest readings of the last 25 years, the correlation of levels, however, has been coming off sharply. The correlation of levels is at its lows for the year, and the lowest since Abenomics became a realistic prospect in November 2013."
"Taking these facts together suggests that USD/JPY and the Nikkei still track each other, directionally, on a day-to-day basis – ie when one goes up over the day, the other is likely to do the same. But the decline in the levels correlation implies that the size of the two moves is no longer comparable – ie the Nikkei may rise a lot, but USD/JPY may only rise a touch."
"The broad conclusion to be taken here is that the domestic drivers of USD/JPY have become less important relative to external drivers. Certainly this fits with a number of measures that we have presented previously – such as the evidence that USD/JPY has fully accounted for the rise in the BoJ’s balance sheet and the rise in inflation expectations."
"This suggest that investors should de-weight Abenomics, relative to some more traditional external drivers of USD/JPY;
particularly the path of Fed policy. This further implies that USD/JPY will continue to struggle, until US bond yields turn higher."