USD/JPY Inter-Market: Watch Divergence US-Japan Yield Spread

USD/JPY Inter-Market: Watch Divergence US-Japan Yield Spread

9 May 2016, 02:38
Roberto Jacobs

USD/JPY Inter-Market: Watch Divergence US-Japan Yield Spread

USD/JPY presents some significant divergence when analyzed against its 10-year US-JP yield spread, as a result of what has been an major withdraw of liquidity by market makers ever since BOJ's disappointing inaction on April 28th, paired with bouts of risk-off.

USD/JPY out of whack with US-JP yield spread

The 20-day correlation coefficient between USD/JPY and the 10-year US-JP yield spread stands at 0.38 at present from levels as high as 0.8 back in early April. The current US-Japan yield spread in the 10-year bonds is essentially almost the same it was prior to BOJ decision on April 28th, time when the rate was exchanging hands circa 112.00. What is more, the fact that the VIX (fear barometer) edged significantly lower last Friday (20-day coefficient correlation quite tight at -0.72), coupled with counter-intuitive USD strength on a US NFP miss, provides a solid background in which bulls may feel re-assured to perceive value.

Bulls have 'pending' catch -up if risk environment allows

Should the 'risk-off' environment recede, USDJPY is likely to be underpinned given that its macro intrinsic valuations appear to be relatively cheap, as bulls have been so far unable to participate in this most recent DXY bounce due to cross-yen supply from risk off flows, which has caused the suppression of the exchange rate sub 107.00.

If equities can now catch a bid tone on improved oil prices in Asia (Oil has spiked to near $46 on Saudi Arabia news from $44.50 Friday), and the environment can now switch to a constructive risk on, there may be some genuine opportunities to participate in Yen short business.


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