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11 Dec 2015
USD/JPY rebound with focus on the Fed – MUFG
FXStreet (Delhi) – Derek Halpenny, European Head of GMR at MUFG, notes that the dollar has rebounded versus the yen ahead of the FOMC monetary policy decision next Wednesday and appetite for shorting the dollar at this point is unlikely to be strong.
Key Quotes
“Over the short-term, the correlation between USD/JPY and the 2-year yield spread and USD/JPY and the performance of Japanese equites can be key and both are currently indicating support for USD/JPY. Japanese equity market declines recently did take USD/JPY lower but recovery today has helped trigger a rebound.”
“However, we would be wary of focusing solely on these correlations as there is certainly a risk of breakdown. Firstly, a long-term analysis of the 2-year spread indicates that the spread is catching up with the yen spot move. Secondly, data out from Japan this week provided further evidence that the oft-spoken about GPIF diversification flow abroad that has been providing support for USD/JPY may be coming to an end.”
“To us a marked drop in one key outflow at a time when Japan’s current account surplus is surging will be just as important for the direction of USD/JPY as the action of the Fed. Additional data also released this week in Japan highlighted another consequence of the devaluation of the yen – Japan’s ballooning net international asset position.”
“The data this week revealed the net asset position is now JPY 361trn – some 72% of Japan’s GDP. Since the end of 2011, Japan’s net international asset position has jumped by nearly JPY 100trn (USD820bn). Return on those assets will continue to support the surplus on the investment income of the current account – a surplus that already amounts to around 4% of GDP. We see plenty of reason to be reticent about prospects for USD/JPY sustaining gains in the aftermath of a Fed-induced widening of the US-Japan yield spread.”
Key Quotes
“Over the short-term, the correlation between USD/JPY and the 2-year yield spread and USD/JPY and the performance of Japanese equites can be key and both are currently indicating support for USD/JPY. Japanese equity market declines recently did take USD/JPY lower but recovery today has helped trigger a rebound.”
“However, we would be wary of focusing solely on these correlations as there is certainly a risk of breakdown. Firstly, a long-term analysis of the 2-year spread indicates that the spread is catching up with the yen spot move. Secondly, data out from Japan this week provided further evidence that the oft-spoken about GPIF diversification flow abroad that has been providing support for USD/JPY may be coming to an end.”
“To us a marked drop in one key outflow at a time when Japan’s current account surplus is surging will be just as important for the direction of USD/JPY as the action of the Fed. Additional data also released this week in Japan highlighted another consequence of the devaluation of the yen – Japan’s ballooning net international asset position.”
“The data this week revealed the net asset position is now JPY 361trn – some 72% of Japan’s GDP. Since the end of 2011, Japan’s net international asset position has jumped by nearly JPY 100trn (USD820bn). Return on those assets will continue to support the surplus on the investment income of the current account – a surplus that already amounts to around 4% of GDP. We see plenty of reason to be reticent about prospects for USD/JPY sustaining gains in the aftermath of a Fed-induced widening of the US-Japan yield spread.”