USD/JPY: will it follow rate spreads? - Nomura

Analysts at Nomura suggested to watch out for fixed income volatility.

Key Quotes:

"USD/JPY now appears to be moving in line with wider rate spreads. Correlation between rate spreads and USD/JPY is now increasing again."

"One notable difference from the January-February period is the still low implied volatility in the fixed income market, even after 10yr UST yields broke 3.0%."

"At the beginning of the year, increased volatility discouraged foreign investment in US bonds, including from Japan, but smoother rises in US yields may attract foreign demand more easily."

"As long as rises in foreign yields are smooth, further upside in USD/JPY and EUR/JPY is possible."

"Albeit at a low level, implied volatility in USTs and JGBs has risen since the middle of last week, and we will monitor moves in bond market volatility as we approach the forthcoming key central bank meetings."