CURRENCY WATCH


FX Yen - JPY Bearish Underlying Trend


The BoJ is no longer diverging only from the Fed, but also from the ECB and the other main central banks: the underlying trend of the yen should be confirmed downwards.


Over the summer months, the yen rose back against the dollar, from lows in the USD/JPY 114 area to new highs for 2017 in the USD/ JPY 107 area. Te strengthening was entirely explained by the widespread weakening of the dollar, through two channels:


1) Yield differentials, with the drop in US yields expressing a reduction in the market’s implied expectations for another fed funds rate hike soon: the correlation between the USD/JPY exchange rate and 2Y US yields has in fact strengthened to over 75%, whereas the correlation


with 10Y yields has almost reached 90% (Fig. A);


2) The rise, in stages, of risk aversion tied to tensions with North Korea (Fig. B).


The yen then resumed declining (as FX TRADER MAGAZINE October - December 2017 21


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