Japanese Investors Give in, Yen Falls Below ¥100 vs USD
Fundamental Forecast for Japanese Yen: Bearish
In a week when the Japanese Yen lost -2.66% to the US Dollar, it speaks to the shifting dynamics of risk appetite that the worst performing currency of 2013 was not the worst performing major currency this week! Despite the long-awaited break of ¥100.00 in USDJPY, the Yen still managed to outperform the new whipping boys of FX, the Australian and New Zealand Dollars, by -0.27% and -0.12%, respectively. To be clear, the Yen’s weakness did not become prevalent until Thursday, when USDJPY started to rally following a much-improved US Initial Jobless Claims (May 3) report, showing that the number of applicants for first-time unemployment benefits fell to their lowest level since the week of January 18, 2008.
All of the sudden, the US labor market looks stable, and chatter has begun to spread about the Federal Reserve laying out its QE3-unwind roadmap, possible at its June policy meeting, when the Fed releases its updated economic projections and Chairman Ben Bernanke holds one of his last press conferences. These shifting market expectations have sent investors out of US Treasury yields, which shot up on Thursday and Friday, which has increased the yield differential between the US Dollar and the Japanese Yen; hence, the rally in USDJPY.
While the US labor market data was strong, it was not enough to push USDJPY up to as high as 101.99 midmorning on Friday. There were two other crucial developments that are likely to carry forward over the coming weeks that lead us to believe that the next leg of Yen weakness has just begun.
First, government data showed thatdomestic investors were buying up overseas bonds in bunches the past two weeks, a significant change in investor behavior. After consistently selling foreign bonds since January 2010, Japanese investors purchased +¥204.4B of foreign bonds in the week ending April 26, and +¥309.9B in the week ending May 3. Why is this significant and what does this mean? Japanese investors are now pouring their capital outside of the country to find yield.Clearly, this is a result of ‘Abenomics’ or the Bank of Japan’s ultra-easing policy.
Second, after market close on Friday, the Japanese envoy to the G7 happily reported that there were no complaints regarding the recent weakness in the Yen. An unnamed Ministry of Finance official was cited as indicating that G7 members were encouraging accommodative policy, and that the spillover effects from the easing – namely a potential asset bubble in Japanese equities – are not all negative. If this is the prevailing sentiment to emerge from the G7 meeting in London, it mind as well been an endorsement of further weakness in the Yen.
With these themes developing, there are a few events on the calendar that are worth noting which could accelerate Yen weakness. On Wednesday (Thursday in Japan), we are of course watching the emerging trend in Japanese investors purchasing foreign bonds, for which data of the week ended May 10 is due. Also due on Wednesday is the 1Q’13 GDP report, which should show a substantial improvement all thanks to the fiscal and monetary stimulus efforts of Shinzo Abe’s government mandate. Growth is expected at +2.7% annualized, from +0.2% in the 4Q’12. The quarterly reading is similar, up +0.7% q/q from flat at the end of last year.
While these data are comforting signs that ‘Abenomics’ may be working, Japanese policymakers are unlikely to be impressed. After all, the efforts are only recently installed and are in place to buck a two decade long trend of deflation and sluggish growth; one quarter isn’t going to be good enough to declare victory. Accordingly, the BoJ should maintain its course on a meet or beat, with exogenous (US driven) influences guiding the Yen via the crosses; and a miss would certainly pull the rug from under the Yen once more. Surely, the beginning of a bigger move seems to be developing, and this coming week should be critical. –CV