The first chart shows how the steep decline in U.S. 10 year yields (white line) has affected USD/JPY (USD/JPY). It is no secret that USD/JPY takes it cue from U.S. yields and the correlation between these 2 instruments are very clear. The upside surprise in non-farm payrolls, retail sales and jobless claims along with the prospect of tapering by the FOMC next week should be driving yields higher but the sharp sell-off in stocks and concerns about this weekend's referendum in Crimea triggered a flight to quality that drove bond prices higher and yields lower. If U.S. yields do not recover soon and drop to 2.5%, we could find USD/JPY trading at New Year to date lows.
Japanese stocks have also been doing very poorly. The initial sell-off was triggered by weaker data from China and a significant depreciation in the Yuan. However the 230-point slide in the Dow on Thursday drove the Nikkei down 3.3% to a 1-month low overnight. Although part of the weakness can be attributed to Yen strength, a sell-off in Asian stocks also puts pressure on risk appetite and USD/JPY. It is generally very difficult for USD/JPY to rally without a rise in the Nikkei and U.S. yields.
Later this afternoon, the CFTC will release its latest report on speculative positioning. These numbers are as of March 4th, which means they are extremely dated but still informing. As of last week, speculators held massive amounts of short yen and long dollar positioning. We suspect that the latest move was fueled by additional profit on long USD/JPY trade.
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