Synopsis:

Nomura analyzes the current state of the USD/JPY currency pair and the broader market dynamics influencing Japanese yen (JPY) depreciation. They emphasize the importance of volatility indicators in assessing the sustainability of JPY weakness, particularly in the context of rising U.S. equities and macro hedge fund positioning.

Key Points:

• Market Performance and Positioning:
  The S&P 500 has shown continued strength, with macro hedge funds halting their reduction of net long positions since early last week. Meanwhile, commodity trading advisors (CTAs) have been gradually increasing their net long positions, indicating a potential shift in sentiment toward equities.

• Volatility Trends:
  Volatility has decreased in line with the rise in equity markets, although the correlation risk premium remains negative. This suggests that while the market is stabilizing, there are still underlying risks that could affect currency movements.

• USD/JPY Recovery:
  The USD/JPY exchange rate has bounced back above 149. Nomura highlights the significance of monitoring volatility as an indicator for the sustainability of JPY depreciation. A decline in the three-month forward implied volatility of USD/JPY below 9% could signal increased demand for carry trades, particularly from macro hedge funds.

• Implications for Carry Trades:
  If implied volatility decreases, it would likely encourage CTAs to expand their positions, further supporting the case for JPY depreciation. This trend would indicate a more favorable environment for investors seeking to capitalize on yield differentials between currencies.

Conclusion:

In summary, Nomura underscores the critical role of volatility indicators in gauging the sustainability of JPY depreciation. With current market dynamics showing a potential rebound in macro hedge fund activity and decreasing volatility, there could be increased demand for carry trades that favor a weaker yen. Investors should closely monitor these volatility trends, particularly in the lead-up to significant events such as the U.S. presidential election.