The unwinding of the carry trade may have seen yen shorts imploded. And that led to the sharp plunge in USD/JPY in early August. However, the event also kicked off a strong hint of risk aversion and traders turned to bonds for safety as well. It didn't really help when market players also panicked in calling for the Fed for emergency rate cuts at the time.
All of that helped to keep the correlation between USD/JPY and 10-year Treasury yields intact.
And they have continued to move in lockstep for most parts since as well. It's one of those correlations that don't typically break in markets. And if it ever does, there's always that opportunity to chase a trade on the convergence.
But for now, that doesn't seem to be the case. That despite the more volatile nature in the Japanese yen lately. I mean today, we're already seeing a near 300 pips range for USD/JPY already. Meanwhile, 10-year yields are down by nearly 3 bps to 3.864%.
Whatever your argument may be on the correlation between the two, one thing is for certain though. And that is the bond market is still playing a key role in driving dollar sentiment at the moment.
10-year yields briefly traded below 3.80% at the start of August but remain at the lows after the most recent rejection near the 4% mark. That's roughly the lowest levels since the end of last year and that's also putting the dollar index in general pinned down near its lowest since January.
