Morning Commentary: Safe No More

Foreign Exchange - Morning Commentary
Safe No More
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Over the past two trading session, USDJPY has broken sharply out of the trading range it has been in since October.  This move towards yen weakness during a period of elevated uncertainty (SARS-CoV-2 outbreak) adds further to the narrative that the yen’s safe haven characteristics could be fading. 

In past commentaries we have touched on how Japan’s low interest rates have practically forced domestic investors to mechanically send money overseas in the search for yield.  This dynamic of a persistently large Japanese portfolio and foreign direct investment outflows has put a floor under yen appreciation and helps to explain why the yen has decoupled from rate-spread implied levels. 

With US equities hitting all-time highs and continuing to outperform the rest of the world, Japanese demand for US risk assets should be strong and fund flow data from last week supports this view.  Last week, Japanese investors net bought around 1.4 trillion yen worth of foreign securities.  To put some scale around this, the YTD purchase amount in 2020 is 16% higher than it was at this point in 2019, a year that was very strong on a historical basis.  Moreover, while banks traditionally hedge their foreign asset exposure, the increased role of pension funds, insurance companies and retail investors has increased the unhedged fund outflows, increasing the impact of these fund outflows. 

Last year, portfolio outflows helped push USDJPY towards the 112 level in the interbank market.  With flow momentum even stronger this year, there remains scope for further yen weakness and a move through last year’s high.   
  • Australia’s jobs report beat expectations with the economy adding 13.5K jobs against expectations for a 10.0K print.  However, and more importantly, the unemployment rate increased to 5.29% from 5.08% prior.  This was partially driven by a higher participation rate than was seen last quarter.  Additionally, it should be noted that January’s number was particularly hit by the bushfires with retail chain stores closed around the country.  Trend unemployment, the RBA’s preferred measure, remained at 5.2%. 
  • Fed minutes released yesterday were largely expected.  Fed officials acknowledged the coronavirus was a concern but reiterated that the current policy stance remains “appropriate.” 
  • Brinksmanship in Brexit negotiations continue with the EU delaying the announcement of its Brexit negotiating position due to French demands for stiffer conditions. 
  • UK retail sales, the first economic read post-election, came in better than expected, rising 1.6% MoM against expectations for a 0.8% rise.  However, the GBP didn’t react much to this number as it came off a low base.  
  • SARS-CoV-2 headlines were mixed overnight.  South Korea reported a surge in cases as well as its first fatality.  On the other hand, China continues to report a decrease in the number of new cases, although this comes amid another change in diagnosis methodology. 
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