USD/JPY intermarket: correlation in S&P and risk breaks down

USD/JPY bears got a boost on the ECB news, but the volatility has seen a chop in the major between 102.60 and just shy of the 103 handle at 102.97 highs.

The strength of the Yen has been a big factor in 2016's FX space. Analysts at Brown Brothers Harriman noted that the Yen is up 17.3% so far this year, despite negative interest rates through 10-years and among the worst stock markets with the Topix off 13.4%.

"We suggest that the answer to the conundrum posed by the yen's strength lies with the Japanese themselves. The yen's weakness associated with the launch of Abenomics coincided with the diversification of Japanese pension fund managers offshore. The recovery of the yen has coincided with the hedging of these flows and the raising of hedge ratios by insurance companies and corporations," explained the analysts.

There has been a weakening of the correlation between the yen and the S&P 500 and that suggests that the yen's so-called safe haven status has weakened.

Looking to spreads, analysts at Brown Brother Harriman explained that the US 2-year yield is up 21 bp over the past three months to stand a little above 80 bp and over the same period, the Japan's 2-year yield has risen 4.5 bp. The spread is near 109 bp today. It has matched the late-July high."Usually, the long-end differentials more important for the dollar-yen rate. The spread has been flattish for two months. It last poked through 200 bp in April, and since then has been trending lower. It reached a low in early September near 155 bp. It is currently a little above 170 bp. On September 20 it was at 175 bp."

USD/JPY levels

The strong rebound from the three-month  support line at 100.07 leaves the pair in positive territory closing in on the 103 handle and has started to look in on the base of the cloud (the top of which lies 103.25). "We have to assume some near term upside scope to the 103.55 16th June low and the 104.32 September high. Intraday dips are indicated to hold circa 101.80 and minor Fibo support at 101.25/20 guards the 100.07 4 month uptrend," explained analysts at Commerzbank.

Current price is 102.82, with resistance ahead at 102.84 (Weekly Classic R2), 102.98 (Daily High), 103.43 (Monthly High), 103.83 (Weekly Classic R3) and 103.89 (Daily 100 SMA). Next support to the downside can be found at 102.38 (Hourly 20 EMA), 102.28 (Daily Classic R3), 102.08 (Weekly Classic R1), 101.98 (Daily Classic R2) and 101.81 (Daily Classic R1).