Morning Commentary: Going with the Flows

A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.

Going with the Flows Share this story: 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.  HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: 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.

If we can help you with any Foreign Exchange needs, please email foreignexchange@cnb.com or call (800) 447‑4133. Want to learn more about international finance, economics, and global events? Sign up for our other Foreign Exchange emails and videos!

Follow City National Bank on social media:

Non-deposit investment products: • Are not FDIC insured, • Are not deposits or other obligations of City National Bank and are not guaranteed by City National Bank, and • Are subject to investment risks, including possible loss of the principal invested. This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. City National Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.

Unsubscribe from this list  |  Update email preferences This message has been sent to bank@banking.offers.report. Please do not reply to this email. To ensure the delivery of future emails, please add foreignexchange@emails.cnb.com to your email address book or safe sender list. Copyright ©2020 City National Bank – All Rights Reserved. 350 South Grand Avenue, 12th Floor, Los Angeles, CA 90071 City National Bank is a subsidiary of Royal Bank of Canada. TERMS & CONDITIONS  |  PRIVACY STATEMENT NMLSR ID# 536994 | City National Bank Member FDIC