Morning Commentary: Land of the Rising Sun and Falling Rates

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

Land of the Rising Sun and Falling Rates Share this story: Andrew Kositkun Foreign Exchange Head Trader

Over the weekend, it was reported that Japan’s Government Pension Investment Fund (GPIF) has started to purchase FX-hedged foreign bonds with bond holdings reaching ~1.3 trillion yen through the end of the first quarter.  In simplistic terms, when Japanese investors purchase unhedged foreign bonds, they have to sell yen to raise funds which puts pressure on a currency to depreciate.  By purchasing FX-hedged foreign bonds, this yen selling pressure gets negated by yen purchases.      Because interest rates in Japan are so low, 2018 has seen a steadily increasing demand from Japanese investors for higher yielding foreign assets.  This has led to consistent yen selling and is one of the key reasons why, in inflation adjusted terms, the yen is near historically weak levels.  Now with the GPIF, a major player in the investment world, beginning to hedge its investments, does this signal end of investment related yen depreciating pressure?    While mechanically hedging foreign investments does decrease depreciating pressures, this new development isn’t necessarily a game changer.  It is important to remember that the GPIF is still a net yen seller.  Additionally, there are other players out in the market, such as retail investors and life insurance companies that continue to purchase unhedged investments.  Lastly, Japanese overseas investments are not just limited to bonds, but also include equities and foreign direct investments.    Although, when it comes to the yen, the more immediate catalyst will be the central bank meetings this week.  The BoJ meets tonight and while it isn’t expected to cut rates, it is possible that it will ease through a strengthening of its forward guidance.  If statement language indicates that the BoJ stands ready to ease further, including cutting rates more negative, it would be sending a stronger signal than its recent verbal assurances have been.    But questions remain as to whether the BoJ has the sufficient tools to move the yen as it remains highly constrained.  As such it seems that the fate of USDJPY is more likely in the hands of the Fed this week.  With a 25 bps point cut a near certainty, the focus should be on Powell’s press conference and indications on the depth and breadth of Fed’s easing cycle.  HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: The GBP continues to find itself under the pressure of Brexit.  The most recent catalyst has been comments from Boris Johnson’s new cabinet members indicating that the government is ramping up no-deal preparations.  In fact, a top aide has a stated that a no deal outcome is a “very real prospect,” which is a vastly different characterization of Johnson’s “million to one” description during his campaign.       Later this week the Bank of England (BoE) meets and the UK will also hold by-elections.  The BoE is expected to hold rates steady and the by-election should reduce the government’s majority to two seats (inclusive of DUP support).  US-China trade talks are back in the headlines with US negotiators in Shanghai.  While face to face talks are positive, the prospects for a long term deal in the near term remain small.  A good market outcome would include China purchasing more soy in exchange for a freezing of tariff increases.

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 ©2019 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