Forex: Japanese Yen Tumbles but US Treasuries Hold Firm - Who is Right?

2012-12-18 17:00:00

David Rodriguez, Head of Product

The US Dollar has strengthened versus the Japanese Yen, but the USDJPY’s strong link to interest rates suggests that further rallies will need a turn in US Treasury yields

Correlation between US Dollar/Japanese Yen and US 10-Year Treasury Note Yields

forex_correlations_us_dollar_japanese_yen_body_Picture_1.png, Forex: Japanese Yen Tumbles but US Treasuries Hold Firm - Who is Right?

US Dollar/Japanese Yen Exchange Rate(lhs)

US 10-Year Treasury Note Yield (rhs)

Correlation between the US Dollar/Japanese Yen and US 10-Year Treasury Note Yield

The correlation between the USDJPY and US Treasury yields remains significant, but a noteworthy JPY tumble (USDJPY rally) has not coincided with a similar bounce in US yields. The important disconnect begs the question: who is right and who is wrong?

It’s a trick question, of course—the concept of “right” or “wrong” is misleading at best. Japanese Yen weakness has come on the heels of an important political shift in Japan and not on a substantive shift in global yields.

Yet the Japanese Yen remains one of the most interest rate-sensitive currencies in the world. The US Federal Reserve recently announced that it would offer further stimulus to keep interest rates lower through the foreseeable future. How did markets react? Pushing long-term yields higher.

If this is indeed the start of a larger reversal in long-term US Treasury yields, we may expect the USDJPY to continue its move higher. Indeed, it will be significant to watch the next moves in US interest rate expectations—we expect the USDJPY to react in kind.

Forex Correlations SummaryView forex correlations to the S&P 500, S&P Volatility Index (VIX), Crude Oil Futures prices, US 2-Year Treasury Yields, and Spot Gold prices.

S&P 500	EURUSD	GBPUSD	USDJPY	AUDUSD	USDCAD	NZDUSD	USDOLLAR
1 Week	-0.35	0.30	0.23	-0.17	-0.73	-0.26	0.21
1 Month	0.20	0.24	0.08	0.50	-0.74	0.51	-0.26
3 Month	0.44	0.38	0.16	0.47	-0.54	0.53	-0.40
1 Year	0.49	0.52	0.22	0.68	-0.74	0.64	-0.53

Gold	EURUSD	GBPUSD	USDJPY	AUDUSD	USDCAD	NZDUSD	USDOLLAR
1 Week	0.38	0.82	-0.01	0.50	-0.49	0.18	-0.45
1 Month	0.24	0.50	-0.01	0.29	-0.43	0.38	-0.31
3 Month	0.41	0.50	-0.08	0.42	-0.31	0.25	-0.50
1 Year	0.51	0.36	-0.23	0.47	-0.31	0.46	-0.57

Crude Oil	EURUSD	GBPUSD	USDJPY	AUDUSD	USDCAD	NZDUSD	USDOLLAR
1 Week	0.68	0.91	-0.07	0.76	-0.34	0.44	-0.68
1 Month	0.61	0.44	0.12	0.29	-0.28	0.27	-0.38
3 Month	0.38	0.40	0.01	0.43	-0.40	0.40	-0.43
1 Year	0.47	0.46	0.12	0.56	-0.61	0.52	-0.50

US 2yr Yield	EURUSD	GBPUSD	USDJPY	AUDUSD	USDCAD	NZDUSD	USDOLLAR
1 Week	-0.85	-0.56	0.52	-0.79	-0.44	-0.61	0.90
1 Month	-0.08	0.01	0.50	-0.23	-0.13	-0.25	0.31
3 Month	0.27	0.25	0.33	0.24	-0.40	0.17	-0.14
1 Year	0.19	0.14	0.41	0.13	-0.26	0.04	-0.03

VIX	EURUSD	GBPUSD	USDJPY	AUDUSD	USDCAD	NZDUSD	USDOLLAR
1 Week	0.47	-0.23	0.03	0.31	0.49	0.50	-0.18
1 Month	0.03	-0.07	-0.09	-0.21	0.60	-0.36	0.02
3 Month	-0.32	-0.38	-0.06	-0.43	0.48	-0.47	0.38
1 Year	-0.40	-0.43	-0.18	-0.58	0.57	-0.56	0.45

Perfect Positive Correlation:				1.00
Perfect Negative Correlation:				-1.00