Everything has been about the current yen show. If you missed an episode do not worry, one can catch up rather easily. The moves are quasi-predictable, certainly repetitive and a license to print money according to so many – what is not to like? Financial markets are even respectful, moving sideways, as investors patiently wait for the mighty dollar to break through the 100-yen mark and this despite the faux pas from the FOMC minutes fiasco yesterday. Global equities have taken their lead from the Fed’s well-publicized mistake. Yesterday’s leaked minutes showed that U.S. policy makers seem in no hurry to pull back on their bond-buying program, even admitting to having a debate over when it should end its stimulus program.
The Bank of Japan has only just begun. As European markets struggle with direction, the capital market seems to know that it has yet to feel the full ramification of the BoJ’s shift to a much looser monetary policy. Under these circumstances, the investor should continue to witness Japanese yields fall, their domestic equities rally and Japan’s own currency weaken further across the board.
Even Goldman has decided to come over to the dark-side and wants to play catch up. Like so many of late, their analysts have cut their forecasts for the yen outright based on Governor Kuroda’s aggressive easing stance and a pick up in the U.S. economy. Just like all good FX Traders should be doing, they take yield into consideration and are talking it up. Fixed Income traders expect the BoJ to keep domestic rates at zero until long after the Fed has started raising their rates – this particular spread has traditionally been an important driver of the dollar-yen exchange rate. Goldman sees yen trading at 102 three-months and 105 one-year outright. This is certainly not an outlandish target; it’s all about a matter of timing.
While dollar yen has garnered the most market focus as the pair inches closer to that psychological 100 barrier, the antipodean currencies have actually led the broad rally against the yen. The Aussie is now trading into 105 AUD/JPY handle territory – the first time in six-years and is also stretching it out against the dollar (1.0565). For the Japanese domestic investors, Aussie and kiwi interest rates are much higher than in the U.S., the eurozone and U.K. and its no wonder that these "local" currencies appear to be more attractive. Even though the carry is not as strong as a couple years ago, the Japanese investor is still getting paid – a bonus in any low rate environment.
Amongst the G10, the EUR is still one of the best performing currencies since the BoJ announced its aggressive easing plans last week. The Japanese investors like euro assets – to them they look cheap on any "curve." Even the threat of currency wars, you know the one no one is talking about or overtly admitting too, is playing a role. Governor Kuroda is the most likely candidate to expand his bank's balance sheet and at a much faster pace than his counterparties at the ECB in the coming months. Add this to a market that was very much EUR short to begin with and we have a natural EUR bid cocktail that will be difficult to be talked “down” anytime soon despite euro policy makers' concerns.
The proof is in the pudding – follow the currency flow, it makes predicting any currency’s direction a tad easier in the short run. By the end of last week, the Japanese investor was a net seller of +JPY1.1-trillion of overseas bonds. They ended up buying +JPY6.3-billion of overseas equities and +JPY75-billion of short-term securities, resulting a net repatriation flow into Japan of +JPY1.06-trillion, up substantially from +JPY0.3-trillion the previous week. All this occurred while the foreign investor continued to buy Japan’s stocks − the pace picked up to +JPY0.87-trillion from +JPY0.22-trillion in the previous week. The foreign inflow totaled +JPY3.76-trillion for the week. The BoJ has its work cut out; this is strong proof on how hard Kuroda and company is going to have to work.
The EUR direction is all about offers and expiries and a few periphery auction results thrown into the mix. This morning, Italy managed again to test the debt waters temperatures and they fared well, avoiding getting burnt at least. The government-less country’s borrowing costs happened to dip in this morning’s debt auction that raised +EUR7.17-billion despite falling short of the maximum target amount and amid a deadlock on a new government.
The Italian Treasury sold -EUR4-billion in three-year product, with the rate falling to +2.29% from +2.48% in a sale last-month. The Treasury also managed to offload +EUR1.67-billion in 15-year bonds, again pushing rates lower to +4.68% versus +4.9% for a similar maturity. The net result – the lowering of any debt costs is always good, but when it’s a periphery auction its particularly good for the 17-member single currency.
Now that the currency has crossed the 1.31 threshold again late Europe or early North America, the market will come up against some strong technical resistance levels to deal with. The first hurdle will be 1.3135 (March 8 high), 1.3146 (55-DMA), and 1.3148-50 (100-DMA). The trend remains the market friend, even if it prefers to front run Japanese flows.
The most excitement will come from this morning’s U.S. jobless claims release. Analysts anticipate initial jobless claims to decline -30K to +355K following last week’s surprisingly high reading. U.S. recent jobs data has been somewhat more disappointing, and suggests that Treasuries may yet richen further before cheapening again – follow the flow, and follow the yield to the pot of gold – the EUR/JPY ride higher is the most likely reason to drag USD/JPY north of 100!