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15 Apr 2013
Forex Flash: Do Japanese bond flows really tell us anything? - Societe Generale
FXstreet.com (Barcelona) - Kit Juckes, Global Head of Currency Strategy at Societe Generale has taken a look at Japanese bond flows and ponders the question, “Do they really tell us anything?”
He begins by noting that Japanese investors were net sellers of foreign bonds last week, dismissing the notion that as soon as the BOJ indicated that it was going to increase the pace of its own domestic bond purchases, there would be an immediate outflow of money. He adds that he had previously warned last week that there are no simples rules to guess what these trends will look like but we'll no doubt pay more attention to the weekly MOF release in the future. He adds that he recently was up to his elbows in the data, getting frustrated. He can see that through the volatility, Japanese investors are resuming foreign bond purchases. He adds, that the BOJ, in introducing policies to weaken the yen, is now going with, rather than against the flow of market trends.
He also plotted Japan's annualised current account balance and long-term capital defined in old-fashioned terms as the sum of equity, bond and direct investment adding that this is a very 1990s way to look at the data! He writes, “The downtrend in the current account balance is clear but long-term capital outflows are bigger and don't help explain yen moves very well. Indeed, consider that in October 2008, when the yen rallied strongly after the collapse of Lehman, Japanese investors bought foreign equities and foreigners sold Japanese equities. So although bond flows show Japanese repatriation, the overall long-term flow was yen-negative. Bottom line - don't place too much faith in these numbers, though I can see why the BOJ might want to reverse the trend of declining long-term capital outflows.”
Elsewhere, he notes that MOF data may show a faster pace of foreign bond buying in the weeks ahead. But either way, he´ll look for the BOJ to squeeze investors out of JGBs, weakening the yen, supporting the Nikkei, and maintaining JGB volatility. Further, the BoJ has clearly revived “risk-on” sentiment and markets have sees a resurgence in correlations between risky assets. He comments, “So AUD/USD and SPX are moving in tandem again, for example, after correlations between the two fell to their lowest in over a year at the end of March.”
At this point, he feels that further risk bullishness probably depends on the slowdown in US economic data being no steeper than the market expects. He writes, “In other words, continued growth at a 1.5-3% rate with the Fed on hold for even longer, won't rock the boat. The data should be good enough to achieve that, so I'm quietly bullish of credit, of higher-yielding bond markets, even of (some) EM currencies. And by association, despite all the obvious long-term issues, I'm going to be a timid sort of EUR/USD bear for now. Perhaps the fall by the yen, and the more recent reversals for both gold and the Bitcoin show, however, that in FX in particular, ‘risk-on' may be able to take a currency to ludicrously overvalued levels but it can't keep it there.”
He begins by noting that Japanese investors were net sellers of foreign bonds last week, dismissing the notion that as soon as the BOJ indicated that it was going to increase the pace of its own domestic bond purchases, there would be an immediate outflow of money. He adds that he had previously warned last week that there are no simples rules to guess what these trends will look like but we'll no doubt pay more attention to the weekly MOF release in the future. He adds that he recently was up to his elbows in the data, getting frustrated. He can see that through the volatility, Japanese investors are resuming foreign bond purchases. He adds, that the BOJ, in introducing policies to weaken the yen, is now going with, rather than against the flow of market trends.
He also plotted Japan's annualised current account balance and long-term capital defined in old-fashioned terms as the sum of equity, bond and direct investment adding that this is a very 1990s way to look at the data! He writes, “The downtrend in the current account balance is clear but long-term capital outflows are bigger and don't help explain yen moves very well. Indeed, consider that in October 2008, when the yen rallied strongly after the collapse of Lehman, Japanese investors bought foreign equities and foreigners sold Japanese equities. So although bond flows show Japanese repatriation, the overall long-term flow was yen-negative. Bottom line - don't place too much faith in these numbers, though I can see why the BOJ might want to reverse the trend of declining long-term capital outflows.”
Elsewhere, he notes that MOF data may show a faster pace of foreign bond buying in the weeks ahead. But either way, he´ll look for the BOJ to squeeze investors out of JGBs, weakening the yen, supporting the Nikkei, and maintaining JGB volatility. Further, the BoJ has clearly revived “risk-on” sentiment and markets have sees a resurgence in correlations between risky assets. He comments, “So AUD/USD and SPX are moving in tandem again, for example, after correlations between the two fell to their lowest in over a year at the end of March.”
At this point, he feels that further risk bullishness probably depends on the slowdown in US economic data being no steeper than the market expects. He writes, “In other words, continued growth at a 1.5-3% rate with the Fed on hold for even longer, won't rock the boat. The data should be good enough to achieve that, so I'm quietly bullish of credit, of higher-yielding bond markets, even of (some) EM currencies. And by association, despite all the obvious long-term issues, I'm going to be a timid sort of EUR/USD bear for now. Perhaps the fall by the yen, and the more recent reversals for both gold and the Bitcoin show, however, that in FX in particular, ‘risk-on' may be able to take a currency to ludicrously overvalued levels but it can't keep it there.”