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Deutsche Bank
Markets Research

Foreign Exchange
FX Spot

19 November 2013

FX Daily
USDJPY: In it for the short-term
Short-term capital flows have become a key driver of currency trends in the era
of unprecedented global liquidity since the Crisis. Last week’s Japanese
balance of payments data offered a timely reminder. They show why USD/JPY
had so much momentum earlier this year and then lost it in the summer. Yet
they still support to the idea that we can rally to 120.
‘Other Investment’ (OI) is a residual category under the Financial Account
which covers trade credits, loans, currency deposits and accounts receivable.
In Japan’s case smoothed OI flows do a good job of corresponding with
moves in USD/JPY (see first chart). They are dominated by short-term loans,
which represent carry trades and institutional foreign asset hedging. After
outflows of JPY12 trillion in the first six months of this year, the OI balance
saw a sharp reversal to an inflow of 10trillion in Q3. That’s about size as the
country’s record trade or direct investment account deficits for the entire last
12-months. It puts other portfolio flows in the shade.
We can hypothesize that a capitulation in speculative positions from elevated
levels did the initial damage when markets corrected sharply lower in late May.
But with rising US yields and a Chinese credit squeeze, individuals and slower
moving institutions clearly refused to take up the slack. And in the context this
‘inter-temporal imbalance’ the OI balance bled over the summer, cumulating in
a very large (JPY6 trillion) September inflow. That was a point of maximum
uncertainty, when most bets had been flattened and the Fed baulked to taper.
It will probably prove the apex in this critical time series.
Smoothed OI flows clearly move USD/JPY

Source: Deutsche Bank, Bloomberg Finance LP

Deutsche Bank AG/London

19 November 2013
FX Daily: USDJPY: In it for the short-term

While we can’t yet see what has happened since, we know that markets
consolidated to form a base in October – the US government shutdown
notwithstanding -- upon which risk appetite has begun to be rebuilt in
November. Last week the Nikkei regained 15k and sits in an uptrend channel
the bottom of which is at 14,250. For USD/JPY corresponding figures are 100
and 98. Short-term positioning remains quite modest and retail investors
appear finally to be re-joining from the sidelines. These should now feed on
good news from China’s Third Plenum, signs of progress in Abe’s Third Arrow
reforms, and a Treasury market stabilized by a further extension in guidance.
So we are likely back in a situation of the OI balance being run down. And after
a false start in Q2, its cumulative stock still has a very long way to unwind
(second chart). Past precedent should see us fall through zero and beyond.
That would mean yen-selling of JPY30-50 trillion (as much as half a trillion
dollars!), encouraged by Abenomics gaining traction and distance growing
between the BoJ and the Fed. That’s the kind of sum that could pin a 120handle on USD/JPY. And it’s the mechanism for a positive correlation with
local equities to be held up.
Trend in short-term loans balance lags USD/JPY, prone to overshoot

Source: Deutsche Bank, Bloomberg Finance LP

Page 2

Deutsche Bank AG/London

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