What’s Driving USD/JPY and EUR/USD  

We’re seeing some big rates and FX moves, so we update our correlation and short-term value models. We find the following:

• USD/JPY is most correlated to rate differentials (Table 1).
  • The 5y rate spread is the best indicator to look at.
  • Looking at levels, rate spreads suggest that USD/JPY should be trading closer to 141 (Chart 1). This suggests that either USD/JPY is set to surge higher or that a BoJ jump risk factor is built in such that USD/JPY will not fully move up with rate spreads.
  • Looking at the correlation of changes in USD/JPY, which is the more statistically proper way of doing this, this suggests that USD/JPY should be trading closer to 133.
  • Bottom line is that rate spreads are what matter for the future direction of USD/JPY – but it is unclear whether USD/JPY will play catch-up to previous moves in yields.

• EUR/USD is most correlated to commodity prices (Table 2).
  • Gold, copper and iron ore feature at the top of our correlation table, followed by CNH and 2y rate spreads. This suggests that China is playing a big factor in EUR/USD.
  • Looking at both levels and changes, EUR/USD is about fairly valued relative to current levels of commodity prices (Chart 2).
  • Bottom line, watch the China story and commodities as a guide to EUR/USD.

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

Photo Credit: depositphotos.com

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