DB February/March vs Now, USD/JPY

[RTFX-Trading]

FX Daily: London
February/March vs Now, USD/JPY
Today's Key Data and Events
EUR Manufacturing PMI for July (final), 54.8 expected (08:00 GMT)
GBP Manufacturing PMI for July, 54.0 expected (08:30 GMT)
USD ADP employment report for July, 100k expected (12:15 GMT)
USD Pending home sales for June, -0.5% mom expected (14:00 GMT)
USD ISM for July, 55.3 expected (14:00 GMT)

Upcoming Event Risks
Aug 3 US non-farm payrolls
Aug 7 FOMC rate decision
Aug. 8: RBA rate decision
Aug. 15: Norges Bank rate decision

G10 FX in the February/March unwind versus the current episode
As far as G10 FX is concerned the current carry unwind has so far largely played out in a similar fashion to the February/March episode. Our first chart today compares percentage changes in various crosses over the first four days of the February/March unwind to their performance since 25 July 2007 (snapshot taken late in the NY afternoon). We have also placed on the chart a 45 degree line (solid) and a trend line (dashed) - not that there is much different between the two! In reading the chart a currency on the 45 degree line is performing exactly as it did in the February/March unwind; while the closeness of the trend line to the 45 degree line shows that recent moves in G10 FX have been similar in magnitude to those earlier in the year. While the broad performance of G10 FX during the current episode (so far) looks similar to that in late February/early March, a few aspects stand out. The first is the weakness in AUD and NZD against the USD (largely reflecting relative strength in the USD); while the second is the modest fall in USD/JPY during the current unwind.

USD/JPY still rates driven
Taking a closer look at USD/JPY we find the pair has continued to largely track interest rate differentials during the current unwind, with the 20 day trailing correlation between USD/JPY and the US/Japanese 2 year swap rate differential around 0.97. Expressing the same point a different way is our second chart (below, right) which compares the weekly change in USD/JPY to the weekly change in the 10 year rate differential, with the chart covering the past year. The data point showing changes over the week to 31 July is in bold on the chart and is close to the trend line (with the prior week in fact right on the trend line). The continued high correlation between rate spreads and USD/JPY during the current episode suggests that the positioning unwinds seen over the past few days have not pushed this pair away from fundamentals.

Adam Boyton
Strategist
(+1) 212 250-8646
[email]adam.boyton@db.com[/email]