Morning Commentary: Going with the Flows

Foreign Exchange - Morning Commentary
Going with the Flows
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Persistent outbound investment flows has been a rising trend, buffering yen appreciation, since 2012 due to limited domestic investment opportunities as Japan’s population ages.  However, recent data has shown a pullback in how aggressive Japanese corporates have been with outbound investments due to declining financial incentives and increasing global growth concerns. 

From a historical perspective, this isn’t a surprising result.  Not surprisingly, economic downturns have resulted in a slowdown in reinvested earnings and an increase in overseas profits repatriated back to Japan.  This is of particular relevance as reinvested earnings have become an increasingly large share of Japan’s total investment outflow over the past decade. 

Should the global outlook continue to deteriorate and Japanese flows follow historical precedent, the yen could appreciate as offshore reinvested earnings slow and profits are repatriated as data from 2000-01 and 2008-09 illustrates. 

However, in contrast to past episodes, the current domestic environment lacks positive yielding assets, reducing the pressure for immediate repatriation.  Even under the assumption that corporates repatriate overseas profits, persistently large portfolio investment outflows should provide an offset.  Of particular note, pension funds, including the government’s pension fund, have stepped up their allocation to foreign debt.  As these portfolio investment flows have been accompanied by yen selling, continue to expect a buffer against yen appreciation even against a backdrop that would normally be supportive of the currency. 
  • EU Finance Ministers reached a deal on a $590 billion virus response package.  This amount totals up to ~2.6% of GDP and doesn’t include anything beyond what was expected.   
  • OPEC+ sort of struck a deal on a production cut with all countries but one agreeing to production cuts.  The baseline for production adjustments will be output as of October 2018 (not a typo).  The hold out country is Mexico and focus now shifts to the G-10 energy ministers’ meeting where countries outside of OPEC+, including the US and Canada, could add to the production cut deal.  News headlines report that AMLO has struck a deal with Trump, but it is unclear whether or not Saudi Arabia will accept this deal. 
  • On the virus front, Spain reported its fewest number of deaths in more than two weeks while the pace of new cases continues to slow in Germany and Italy.  In the US, projections on the number of deaths have shifted down to 60,000 from as high as 200,000 in prior forecasts. 
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