Analysts at Nomura explained that the correlation between rate spreads and yen-crosses is recovering. BOJ normalization expectations have declined after policy tweaks in July, while G3 bond market volatility has remained low, thanks to the stronger forward guidance by the ECB and BOJ.
"As the correlation is back in a low volatility regime, the strong US economic momentum, as confirmed by data last week, should support USD/JPY smoothly. Near-term downside risks – likely from EM economies and how the Fed reacts to the recent EM volatility – will be important.
As the impact on US financial conditions from EM volatility has been muted so far, we do not expect the Fed’s stance to be affected materially at the next FOMC meeting. At the same time, as the US fiscal impulse fades as we move into 2019, this could increase gradually the Fed’s sensitivity to overseas developments."
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