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The Japanese Yen was the top-performing G10 currency to round out the week’s trade, breaking its long-standing correlation to major risky asset classes and finishing higher despite relative outperformance in the US S&P 500. The Japanese Nikkei 225 index likewise ended the week’s trade up a respectable 0.9 percent above its open—making Yen strength an admittedly unexpected outcome. Key questions remain on the sustainability of the Japanese Yen’s advance, however, as recent IMM data points to extremely one-sided speculative positioning on the US Dollar/Japanese Yen pair. Indeed, our recent forex options and futures sentiment data showed large speculators had been the most net-long Japanese Yen since it set a noteworthy bottom in March, 2008. Speculative sentiment has since moderated considerably, but such COT data supports further JPY pullbacks and not continued appreciation.



The break in the Yen’s typically rock-solid correlation to risky asset classes makes predicting near-term price action far more difficult, and it seems increasingly likely that the USDJPY will primarily trade on developments in the US economy. The US Dollar itself likewise broke its correlation to the US S&P 500 and other risky asset classes—rallying despite stock market strength. A string of positive US economic releases may partly explain the break, and we may do well to watch a string of key US event risk in the days ahead. Hotly-anticipated US Consumer Price Index data and the US Federal Open Market Committee rate decision will likely dominate US Dollar price action, while the Japanese Yen could move on any surprises out of the upcoming Bank of Japan rate announcement.

Markets overwhelmingly predict that the Bank of Japan will leave interest rates unchanged at their upcoming meeting, but it may be important to watch for any and all references to the Japanese Yen. FX markets had recently forced the JPY to its highest levels in over a decade, but very quickly reversed course on vague threats of FX market intervention from the Ministry of Finance and Bank of Japan. Given deflationary headwinds for the Japanese economy, the central bank is staunchly against further Yen appreciation. Whether or not they comment on the fact may force substantive currency volatility in the week ahead.

Despite the breakdown in correlation between the Japanese Yen and global risky asset classes, we suspect that any major moves in global markets will force commensurate shifts in FX markets. The week ahead promises several top-tier pieces of US and Japanese economic event risk, and we expect big short-term moves from the USDJPY. Suffice it to say, traders should be on alert for substantive surprises out of a key number of highly-anticipated events.