After trading in nearly perfect unison and with an R2 of about 0.8 for over half a year, in the last week the speculative pattern in the GBP-JPY correlation had a dramatic breakdown. Whether this is due to expectations that the BOE will have to hike rates to deal with 4% inflation, or continuing massive quant deleveraging behind the scenes of residual positions as traditional factors now blow up daily in the faces of quants, is unclear. What is clear is that suddenly one of the more long-lived spec FX correlations has whipsawed to the point where it has left many FX traders nursing critical wounds.
Note the surge in GBP bullish bets, and the plunge in JPY. Those willing to bet that the spec crowd is always one step behind the curve may be well advised to take the other side of the trade.
And for the FX fanatics who can't wait for trading to start tonight, here is the latest from Goldman's John Noyce: