###POV: CORRELATION BETWEEN JPY SPOT.....>

DOLLAR-YEN: ###POV: CORRELATION BETWEEN JPY SPOT AND OPTIONS MARKETS BROKEN DOWN

-The JPY remains, by a long way, the best performing G10 currency YTD having

risen 3.4% against the EUR, 5% against the USD and close to 7% against the CAD.

-Much of these gains came alongside the equity/vol product meltdown in early

February (USD/JPY dropped close to 4.5% in the first two weeks of the month) and

the associated cost of hedging against JPY strength rose sharply.

-This sharp rise in JPY hedging costs, shown in the drop to approx. 18 month

lows in USDJPY 3m Risk Reversals has been entirely unwound, with USDJPY implied

vols reversing the entire early Feb move higher.

-This isn't the case for spot USD/JPY. In early Feb, when options markets were

priced as they are now, the USD/JPY rate was well above the Y110 handle,

signalling a breakdown in the correlation between JPY hedging costs and the

value of the currency. This raises the risk of a near-term USD/JPY rally (or a

sharp rise in JPY implied vols) as markets look to close the gap.

-BoJ outlook could be key here after the central bank's tweak to their Rinban

operations overnight as they trimmed bond buys.