A Turn in USD/JPY?

There are many reasons to believe that USD/JPY will head lower in the coming months, most of which center around the weak US and global economic outlook.

However there is one reason why we could see a turn, and that is the correlation between USD/JPY and the VIX (which measures the volatility in the equity market). Usually when the VIX (which is inverted in the following chart) rises, USD/JPY falls because high volatility tends to propel investors into the safety of the Japanese Yen.

Do you think 87 is the bottom in USDJPY?

Comments

[morph366:]

Interesting observation. SInce VIX will also tend to track inversely the performance of the S&P 500 the corollary to your question might be is there a bottom in place for US equities?

Jan 31 05:54 AM

[Conan the B...:]

Why are you using an inverse correlation for the VIX?

Wouldn't a better visual be created by just depicting reality?

Which is what I will have to do to get a sense of what you are trying to say. 3 lines: USD, JPY, VIX

Jan 31 11:49 AM

[silverwood:]

Kathy Lien wrote..."Usually when the VIX (which is inverted in the following chart) rises, USD/JPY falls because high volatility tends to propel investors into the safety of the Japanese Yen."

I question the validity of this statement, The safety of the Yen?

I believe what is a more likely explaination is investors covering short positions in the Yen. Those investors/funds who borrowed Yen and then went out and bought various higher yielding USD denominated investments are now unwinding those positions, the famous Yen Carry trade as it has been called.

Jan 31 12:47 PM

[Ariel-UBT:]

Fundamentally it makes sense, considering that with higher volatility the Nikkei as well as the US equities markets tend to weaken, and the yen and the dollar rise along with the VIX. The Neikkei chart is similar sobering, and the charts of the yen and the dollar both look poised for higher levels even on their own ... so this is an interesting corrollary signal as well.

Jan 31 06:39 PM