USD/JPY / VIX and rates relationship - Nomura

Analysts at Nomura explained that USD/JPY is more sensitive to rates in a low-volatility environment historically and the sensitivity of USD/JPY to rate spreads tends to be higher when the VIX is low.

Key Quotes:

"Based on the sample since 2010, the estimated USD/JPY beta to the 5yr rate differential is 9.4 when VIX is at a low level (one standard deviation or more lower than average), while the beta is below 5 when the VIX is above average. 

We can see the same pattern of greater rate sensitivity under the low-volatility environment since 2000 too. 

After spiking in August 2015, VIX has been gradually declining so the recent stronger USD/JPY sensitivity to rate differentials is unsurprising. 

Diminishing expectations for a Fed hike, owing to disappointing inflation data, are depressing USD/JPY via a narrower rate spread. Lower rate hike expectations also provide a low-volatility environment, strengthening the impact of rate spreads on USD/JPY. 

The relationship between USD/JPY and US equity prices is consistently weaker.

The greater sensitivity of JPY to rate spreads in a low-volatility environment is also observed more broadly against other G10 FX.

We estimated the impact of 10bp widening in the 5yr rate differential on major yen crosses, by the level of VIX since 2010. 

When VIX is one standard deviation or more lower than the average, yen crosses tend to be more sensitive to 5yr rate spreads.

A low-volatility environment may accelerate carry trade-type activity, making yen-crosses more sensitive to rate differential."