DB FX Daily : USD/JPY and Volatility; EUR/USD Update

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FX Daily: London
USD/JPY and Volatility; EUR/USD Update
Today's Key Data and Events
NOR Unemployment rate for May, 2.6% expected (08:00 GMT)
GBP IP for June, 0.1% mom (0.8% yoy) expected (08:30 GMT)
DEU Manufacturing orders for June, -0.6% mom (10.5% yoy) expected (10:00 GMT)

Upcoming Event Risks
Aug 7 FOMC rate decision
Aug 8 BoE Inflation report
Aug 8: RBA rate decision
Aug 15: Norges Bank rate decision

JPY/USD and the CVIX
The recent bout of risk aversion in markets has unsurprising seen our measure of currency volatility (the DB CVIX) move higher, although it remains (just) below the highs seen during the February/March unwind. In contrast the VIX made new highs for the year during the current episode, although its increase this time around has actually been a little less than that seen in February/March (unlike volatility in the currency market, volatility in the equity market never fully pulled back post February/March).

The increase in currency volatility and the move lower in USD/JPY has kept the tight relationship between the two intact as our first chart below shows. This suggests that USD/JPY will stay under pressure while volatility in markets remains above its recent lows. To get a headstart on FX market volatility we would be watching equity markets, with the VIX tending to provide a small lead.

The news flow has continued to support EUR/USD
We wrote last week that the evolution in the Eurozone/US rate spread should provide some support to the single currency. Since then Trichet has effectively announced a September ECB rate hike through the use of the phrase "strong vigilance"; while the data flow in the US has been a little disappointing (payrolls up 92k versus the reported consensus of 127k with the unemployment rate rising to 4.6%, while the non manufacturing ISM joined its manufacturing counterpart in printing below expectations). If we update the chart from Thursday's daily we can see that while EUR/USD has moved higher over the past few sessions, the rates differential has also widened out and continues to suggest further EUR strength.

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