By Kathy Lien

Since the beginning of the month, the US dollar has skyrocketed against the Japanese Yen. The strength of the currency pair has baffled nearly all forex traders. For the past 12 months, USD/JPY has traded in lockstep with US equities, but as the Dow Jones Industrial Average hits a 12 year low, USD/JPY has soared to a 3 month high. The correlation that once provided currency traders with a reliable explanation for day to day price action is only adding to the confusion. Risk aversion was the predominant theme in the financial markets this past week and yet USD/JPY, “the” barometer of risk is rising and not falling.

The surprising weakness of the Japanese Yen has been attributed to investors finally waking up to the problems in the Japanese economy. Based upon the fact that Japan is running its largest trade deficit in 28 years and 2 interesting correlations identified by UBS and Deutsche Bank, fundamentals may be mattering to the Japanese Yen once again.

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