Thursday, April 16, 2009

The Debts of the Lenders: TIC Data Confirms Yen Weakness for Early 2009

Scarcely 3 months ago, some forex commentators speculated that the USD/JPY would strengthen all the way to the low 80s/upper 70s. 2 and a half weeks ago, the USD/JPY had weakened further until was at 90. Now it is floating around the 100 range.

Have the Japanese fundamentals changed? Not exactly. Exports to the US remain weak as consumer spending is still on life support. BUT the demand for yen has slackened as Japanese households have become more confident and made a cautious return to risk by leaving JGBs (Japanese government bonds) and venturing slowly back to higher yielding investments in foreign shores. Evidence of such returns can be found in the cross pairs such as JPY/AUD, JPY/BRL, and JPY/CAD (3 commodity currencies).

But the biggest catalyst was the purchase of a net $27 billion increase in US treasuries (of all maturities) in February 2009. The bulk of this buying was probably government or institution oriented as the BOJ has run out of room to cut interest rates and has run into a large wall of public anger over government fiscal stimulus plans. Money managers and bureaucrats had to find new new ways to lend hard earned Japanese savings and found it in the traditional channel of subsidies to Uncle Sam.

Once again, however I caution readers that this is lagging data. March has been a singularly poor month for hedgies who - if one is to believe accounts from the financial blogosphere - were not particularly well positioned for the staggering equities rally. Many were caught net short and might face an increased demand to "unwind" their positions via the carry trade. Moreover, the yen is facing some technical weakness as short term it looks oversold on the stochs and MACD.


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