CORRELATIONS CORNER: USD/JPY and Treasury yield correlation breaking down into year’s end

http://www.forex.com/uk/post?SDN=eae08697-06ae-4068-af87-9514d11282ea&Pa=20db1fa6-e674-420c-9a87-2ee29261d638

The USD/JPY pair and U.S. Treasury yields have traditionally had a high correlation, specifically with shorter term rates such as the 2-year Treasury yields seen below. Looking at the correlation this past year (exhibit 1), we can see that there has generally been a strong relationship in 2010 with an average correlation of about 0.83. This relationship has been diverging significantly since December began, dropping to yearly lows of about 0.54 today. Yen bulls have been driving the USD/JPY pair lower while Treasury yields have been advancing. While this relationship continues to diverge, the risk is that USD/JPY falls further as it approaches significant levels. The 15-year low in USD/JPY seen in late October is just above the psychological 80.00 level at around 80.25 and the all-time low of 79.75 seen in 1995 is just below that. With the greenback weakening to record levels recently as seen by record lows against AUD and CHF, it would not be surprising to see record lows against the yen as well – especially given recent positive economic data out of Japan. As a result of recent yen strength, interventionist rhetoric has picked up in Japan. See: FUNDAMENTAL UPDATE: Japanese officials resume jawboning  

Source: Bloomberg, FOREX.com

Source: Bloomberg

Eric Viloria, CMT
Senior Technical Strategist
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