DB FX Daily: FX and equity correlations, JPY positioning

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[B]DB FX Daily: FX and equity correlations, JPY positioning[/B]

FX Daily: London
FX and equity correlations, JPY positioning
Today's Key Data and Events
GBP CPI for July, -0.2% mom (2.3% yoy) expected (08:30 GMT)
EUR GDP for Q2, 0.5% qoq (2.8% yoy) expected (09:00 GMT)
USD Core PPI for July, 0.2% mom expected (12:30 GMT)
USD Trade balance for June, -$61.0bn expected (12:30 GMT)
CAD Trade balance for June, $C5.6bn expected (12:30 GMT)

Upcoming Event Risks
Aug 15: Norges Bank rate decision
Aug 23: BoJ rate decision
Aug 31: Jackson Hole Symposium
Sept 6: ECB rate decision

FX and equity correlations, signs of a moderation
We have highlighted over the past week the high correlations between equity markets and FX. However, yesterday's session showed signs that these previously tight correlations may be breaking down. The chart below shows intra day correlations between various currency pairs and the S&P 500 during the US day session. As the chart shows, FX tracked developments in the equity market very tightly on Thursday, with some modest reduction in correlations on Friday. Monday's session saw a further reduction in the extent of correlation between the S&P 500 and currencies (EUR/JPY stands out as an exception, with the correlation co efficient here remaining very high). With a G-10 carry basket having declined by more than the 5% line in the sand that typically separates a correction in a longer term carry bull market from a more persistent carry drawdown, the reduction in the degree of correlation between currencies and equities suggests that equity market stabilization may not prevent further carry downside.

JPY positioning, Japanese margin traders take a contrarian view
Both the IMM Commitment of Traders report and our own positioning indicators showed a further reduction in JPY shorts over the past week. Indeed the IMM CoT data showed net JPY shorts at their smallest level since December 2006, with positioning having been substantially scaled back over the past three weeks (JPY shorts reported at 34.5k contracts for the week ended 7 August compared with the peak of 188.1k on 26 June 2007). Our own positioning indicators also showed a further decline in JPY net shorts to close to flat. However, not all participants in the FX market have scaled back JPY shorts. Our second chart (below right) shows that net long USD/JPY positions on the Tokyo Financial Exchange remain at very high levels, while net long GBP/JPY, NZD/JPY and AUD/JPY positions have actually increased over the past fortnight.

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