USD/JPY has been on a tear since the beginning of the month in large part due to rising U.S. yields. Based on the following chart, the slope of the recent rally in USD/JPY is much steeper than the slope of the 2 year U.S. Treasury yield which suggests that either the run in USD/JPY is overdone or U.S. yields need to rise further – you decide.
JPMorgan is trying to compare this to Dec 2009, which I have circled in the chart:
There have only been two instances since the Fed started its zero interest rate policy, when the USD was strong at the cost of the JPY – February 2009 and December 2009. Particularly, the latter month saw a risk rally, which is a better resemblance of the current situation. USD/JPY rallied about 10.5% in December 2009. If we see a rally of the same magnitude this time around, the pair could reach 84. That being said, we still believe USD (and hence USD/JPY) upside is limited unless we see a sharp rise in UST yields
Before you know it, the Bank of Japan will be delivering their monetary policy announcement. Far less attention has been paid to the BoJ announcement than last’s ECB or RBNZ meetings and for good reason. For the past few years, the central bank has been more reactive than proactive and never one to opt for surprises. The following table shows how economic data has fared since the last meeting and its clearly been mixed. Given the lack of clarity on the state of the economy, there is very little reason for the central bank to act. However the economy is improving which will reduce pressure on the central bank to increase stimulus. A stronger recovery is possible in the coming months as production returns to normal levels – therefore we would not preclude the possibility of optimistic comments from the BoJ
It has been a while since I provided updated numbers for the market’s rate hike expectations and I will chalk it up to my travels! Rate expectations are always changing and a lot has happened over the past month. Its always important to keep track of them because they reflect what investors are pricing in!
Fed – One 25bp rate hike expected by Q2 2012 > Compared to Q1 rate hike before BoE – First Rate hike expected in Jan > compared to prior forecast for 50bp rate hike in 2011 ECB – 50bp of additional tightening expected > compared to 75bp after April hike RBA – Close to one 25bp rate hike by years end > significant upgrade from March expectations RBNZ – One rate hike in Jan 2012 > bumped up from March BoC – 25bp rate hike in Oct > slight downgrade in rate hike expectations
The sharp rise in the Japanese Yen has triggered a lot of talk of repatriation by Japanese investors and the price action of the Japanese Yen certainly suggests that this could be true, but has the earthquake really put investors offline? I did some research on this and here’s what I found:
1) The MoF publishes weekly data on Japanese purchases of foreign bonds and stocks. The latest data was from March 11th and it showed Japanese purchases of foreign bonds rising by Y772B. This report doesn’t accurately reflect positioning after the earthquake but next week’s report will be important because that will include the post-earthquake flows.
2) The Tokyo Financial Exchange publishes daily data on Forex Margin Contract positioning. According to the latest reports, we have not seen a major decline in short and long yen holdings since the beginning of the month. Between March 1 and March 16, total long and short USD/JPY positions declined by 3.86% while total long and short positions in AUD/JPY increased 27.87%. Here are the numbers:
3) Most of the foreign investments held by Japanese investors are in the form of Toshins (foreign currency denominated investment trusts). Their holdings are estimated to be around Y25 trillion ($300 billion). Repatriation of Toshin investments are rare but of course, these are unprecedented times for Japan. Japanese investors tend to freeze their Toshin investments first to avoid additional losses. The population in the region most affected by the quake also tend to be far more conservative investors than the rest of Japan which means that their holdings of Toshin investments are lower. Toshi investments are also usually held by high net worth individuals.
4) Finally, from my observation, Japanese traders have not slowed down at all and in fact have increased activity most likely due to the increase in market volatility.
Therefore it would be remiss to automatically assume that Mrs. Watanabe has been so shelled shocked by the earthquake and nuclear crisis that she has stopped trading or brought all of her foreign held funds back home.