Japanese Yen Likely to Range Trade Against the US Dollar

Week in and week out, we have repeated that financial market risk sentiment and the trajectory of the S&P 500 would be the major determinant of USDJPY price action. Yet the US Dollar has actually taken top-billing as carry trade funding currency as it now carries the lowest overnight yield of any major world currency. The truly substantive shift in interest rates has meant that the USDJPY’s correlation to risky assets has fallen considerably from its heights, and it is admittedly unclear whether the USDJPY would decline on S&P 500 tumbles. In fact, the rolling correlation between the US Dollar Index and S&P is very near record-highs—emphasizing the Dollar’s sensitivity to risk sentiment.

The Japanese Yen may subsequently struggle to find a bid against the US Dollar as it trades near substantive highs. The confusing US Dollar/Japanese Yen links to risk sentiment likely explain low volatility expectations for the currency pair, and it seems traders are pricing in range trading for the often fast-moving USDJPY. This stands in fairly stark contrast to volatility expectations for other major currencies—theoretically providing safe haven for range traders and scalpers in the week ahead. - DR