BNY Mellon: The Aerial View: USD/JPY – Key Facts

Oct 24, 2018

With risk aversion a continuing theme, it’s worth remembering a few key points about USD/JPY:

CorrelationIt’s noticeable that sustained periods of high correlation between realized volatility in USD/JPY and S&P 500 have become more common since 2004, when the Japanese Ministry of Fiance stopped authorizing regular intervention in the FX markets.

These periods of high correlation have tended to emerge when market sentiment has been building to extremes (in either direction).

This pattern can also just be discerned in the timing of major risk aversion moves seen in USD/JPY. It is noticeable that in both 1987 and 1998 the moves into the JPY came a short time after major declines had been seen in the S&P 500.

Post-2004, however, the risk-off moves into the JPY have tended to coincide with falls in equity markets. Good examples of this include August 2007, March 2008 (Bear Stearns), H2 2008, May 2010, March 2011 and August 2015.

VolatilityThe way USD/JPY trades has been well established for over two decades, with the relatively high cost of owning JPY discouraging investors from being long the currency unless they have absolutely had to be.

The net impact of this has been that risk aversion related moves lower in the USD against the JPY have had a tendency to be vicious, with October 6/7/8 of 1998 remaining the primary examples of how bad it can get (overnight realized volatility spiked to north of 90%).

While this remains the record, there have been quite a number of days since then when overnight realized volatility has headed north of 35%.

Unsurprisingly, each one of these occasions (August 2007, October 2008, May 2010, March 2011, June 2016 and November 2016) has coincided with stock market weakness.

ScaleSince 1971 the USD has registered 285 trading days when it had fallen 13% or more against the JPY over the previous three months.

These individual days clustered into 10 distinct groups. While not all of these groupings of sustained USD weakness (most obviously the post-Plaza Accord decline) coincided with equity market weakness, this pattern has become rather more apparent post-1987.

SeasonalityThe second half of the year has proved rather more dangerous for the USD since 1970, with 29 of the top 50 monthly declines against the JPY being seen during this time.

July and October proved the worst months in H2, with seven appearances each on the top 50 list. The average decline seen in October (7.33%) was materially worse than that for July (5.29%).

PositioningCFTC data in JPY futures contracts on the CME show that non-commercial players continue to run significant short positions.

While not at the scale seen in the summer of 2007, the current position is comparable to that running into the start of 2014 or the beginning of this year.

Our own iFlow data indicate a slightly different picture, with investors showing little appetite to own JPY but nevertheless proving more cautious than they have done.