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25 Mar 2013
Forex Flash: Fixing effect leaves USD/JPY a buy for Japanese lifers - Societe Generale
FXstreet.com (Barcelona) - Sebastien Galy, Senior FX Strategist at Societe Generale note that overnight, news that foreign holdings of JGBs reached new lows which he sees as no great big surprise.
However, more importantly, the end of the Japanese fiscal year is fast approaching and as expected, the demand for repatriation by corporates of revenues back into JPY is much stronger. He adds that Japanese firms managed to sell more cars in the US, but more broadly, their initiative to keep cash overseas has changed under Abenomics. He writes, “It (has) become more interesting to invest at home than pursue a strategy of hollowing out Japan.”
Further, he notes that a typical Japanese corporate is a very good spot trader, so that their activity is anything else than mechanical but one which is a mix of mechanical and timing and it is as valid for them as it is for life insurers. However, the difference is that year end forces significant activity. He writes, “As the corporates buy JPY, our colleagues tell us that Japanese life insurers will be on the other side of the deal selling JPY. That is such activity is happening even before the start of the new year. A forced buyer of JPY on one side and a forced seller means a strategy by lifers of buying USD/JPY on dips presumably post fixings.” Meanwhile, he notes that risk on risk off outweighs empirically this mechanism and in the current environment of closing your eyes and hoping for the best it suggests a mild demand for long USD/JPY.
Overall, Galy comments that all of this suggests some high frequency volatility but deeply mean reverting. he finishes by writing, “We closed our USD/JPYseagull (option) as the odds are that even the upcoming BoJ meeting will not change the equilibrium of USD/JPY, which settles into a range with a mild buy on dip strategy. The differential between JGB and UST is steadily rising suggesting that Japanese lifers will be a prime candidate for reducing their hedging ratios and buying UST.”
However, more importantly, the end of the Japanese fiscal year is fast approaching and as expected, the demand for repatriation by corporates of revenues back into JPY is much stronger. He adds that Japanese firms managed to sell more cars in the US, but more broadly, their initiative to keep cash overseas has changed under Abenomics. He writes, “It (has) become more interesting to invest at home than pursue a strategy of hollowing out Japan.”
Further, he notes that a typical Japanese corporate is a very good spot trader, so that their activity is anything else than mechanical but one which is a mix of mechanical and timing and it is as valid for them as it is for life insurers. However, the difference is that year end forces significant activity. He writes, “As the corporates buy JPY, our colleagues tell us that Japanese life insurers will be on the other side of the deal selling JPY. That is such activity is happening even before the start of the new year. A forced buyer of JPY on one side and a forced seller means a strategy by lifers of buying USD/JPY on dips presumably post fixings.” Meanwhile, he notes that risk on risk off outweighs empirically this mechanism and in the current environment of closing your eyes and hoping for the best it suggests a mild demand for long USD/JPY.
Overall, Galy comments that all of this suggests some high frequency volatility but deeply mean reverting. he finishes by writing, “We closed our USD/JPYseagull (option) as the odds are that even the upcoming BoJ meeting will not change the equilibrium of USD/JPY, which settles into a range with a mild buy on dip strategy. The differential between JGB and UST is steadily rising suggesting that Japanese lifers will be a prime candidate for reducing their hedging ratios and buying UST.”