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Last weeks portfolio flow reports out of Japan (Oct. 4th) saw one of the largest inflows on record. Japanese residents repatriated +¥2.22-trillion - driven primarily by the sale of foreign bonds. While the large one-off selling may be considered somewhat extraordinary, analysts note that looking at the four-week average, there is little evidence to suggest anything unusual. Investor flows remain consistent with rebalancing of assets following recent USD/JPY moves.

However, the USD/JPY gain over the last few days probably tells a more compelling story. It strongly suggests that the FX market does not believe the US will fall over its fiscal cliff. There seems to be enough belief being currently priced in by investors to indicate that rivaling US lawmakers will not be reckless and irresponsible when its finally comes to "crunch time." Under the present circumstances it would probably require a US default or "selective default" as defined by various rating agencies to trigger considerable Yen gains for safe-haven reasons.

The current stalemate scenario in the US would need to push the US economy towards a renewed recession before markets get to witness the Yen bull claiming the upper hand. The short-term techies expect the USD/JPY to maintain its upward momentum and continue to climb slowly towards the psychological ¥100 – being supported by the recent spate of disappointing Japanese macro data.

Source: The FX Market Doesn't Expect The U.S. To Drive Off The Fiscal Cliff