- JPY intervention starts as we expected "The MOF intervened unilaterally in the forex market on 15 September by selling JPY, likely triggered by the government’s motivation to defend the 80 line. Although the intervention was unilateral, we think it was probably unsterilized (i.e., that the BOJ is unlikely to try to mop up the liquidity created). Judging by reports that MOF sold some ¥2.0trn of JPY on 15 September, we estimate that by the time its intervention is finished they would have sold ¥10–20trn. Although we estimate that USD/JPY could rebound to 85–87 in the near term, forex market trends are largely determined by USD weakness against all major currencies, which reflects the poor fundamentals of the US economy. We are therefore maintaining our forecast for USD/JPY at 82.5 by end-2010 and 80.0 by end-March 2011."
- Impact of JPY intervention on the rest of Asia "In our view, Japanese FX intervention (first since March 2004) marginally weakens the short USD/Asia story. Asian central banks may view Japan's intervention as an additional reason to resist local FX appreciation, despite global political pressure to move (namely on China). However, we do not believe the Asia ex-Japan authorities can argue on the same fundamental basis as Japan given the large divergences in broad economic performance, exports, equity markets and FX valuation. In this respect, we think that the impact of JPY intervention could be important, but not decisively for Asian FX. This may, for example, support reducing our short USD/CNY trade. However, we do not think that it markedly alters the core story (see FX Insights: China Visit Notes, 1 September 2010). Likewise, it reduces our conviction on our short EUR/KRW trade (See FX Insights: Recommend marginally adding a short EUR/KRW trade, 6 September 2010)."
- JPY - Why JPY appreciation had accelerated despite an increase in Japanese outward investment
"In August, USD/JPY dipped below 84, its lowest level in 15 years, as JPY continued to strengthen. However, the MOF's latest International Transactions in Securities report revealed that Japanese net outward portfolio investment increased to roughly ¥5trn in the same month. We see three likely reasons for the apparent contradiction between an increase in outward portfolio investment and observed acceleration of JPY appreciation: (1) transactions not involving forex transactions, (2) purchases of short-term Japanese bonds by a number of foreign government investment institutions, and (3) currency hedging by Japanese institutions and companies. What appeared at first sight to have been large-scale Japanese outward investment in August turned out not to be powerful enough to reverse the downtrend in USD/JPY in August."
- GBP: Further recovery in store "This week, we released the second in our series of Strategic Currency Views, which presents a comprehensive analysis of the key factors influencing the outlooks for currencies. Here we summarise our findings for sterling. For the outlook in its entirety, please see The UK pound: Further recovery in store, 14 September 2010."
- Impact of JPY intervention on the rest of Asia "In our view, Japanese FX intervention (first since March 2004) marginally weakens the short USD/Asia story. Asian central banks may view Japan's intervention as an additional reason to resist local FX appreciation, despite global political pressure to move (namely on China). However, we do not believe the Asia ex-Japan authorities can argue on the same fundamental basis as Japan given the large divergences in broad economic performance, exports, equity markets and FX valuation. In this respect, we think that the impact of JPY intervention could be important, but not decisively for Asian FX. This may, for example, support reducing our short USD/CNY trade. However, we do not think that it markedly alters the core story (see FX Insights: China Visit Notes, 1 September 2010). Likewise, it reduces our conviction on our short EUR/KRW trade (See FX Insights: Recommend marginally adding a short EUR/KRW trade, 6 September 2010)."
- JPY - Why JPY appreciation had accelerated despite an increase in Japanese outward investment
"In August, USD/JPY dipped below 84, its lowest level in 15 years, as JPY continued to strengthen. However, the MOF's latest International Transactions in Securities report revealed that Japanese net outward portfolio investment increased to roughly ¥5trn in the same month. We see three likely reasons for the apparent contradiction between an increase in outward portfolio investment and observed acceleration of JPY appreciation: (1) transactions not involving forex transactions, (2) purchases of short-term Japanese bonds by a number of foreign government investment institutions, and (3) currency hedging by Japanese institutions and companies. What appeared at first sight to have been large-scale Japanese outward investment in August turned out not to be powerful enough to reverse the downtrend in USD/JPY in August."
- GBP: Further recovery in store "This week, we released the second in our series of Strategic Currency Views, which presents a comprehensive analysis of the key factors influencing the outlooks for currencies. Here we summarise our findings for sterling. For the outlook in its entirety, please see The UK pound: Further recovery in store, 14 September 2010."
- RBNZ signals slow path to a lower “neutral” rate: Receive NZD IRS 5fwd 5yr "The Reserve Bank of New Zealand (RBNZ) kept its policy rate unchanged at 3.0% today, which was widely expected, but the policy statement and subsequent comments by Governor Alan Bollard were more dovish than expected. The RBNZ is signaling both a slow path to a “neutral” policy rate, and that the level of that “neutral” rate has declined. We recommend maintaining long duration positions in the NZD IRS curve, but see the NZD IRS 5fwd 5yr as currently offering a more attractive opportunity than the front end of the curve. For investors concerned about liquidity risk in terms of the IRS curve beyond 5 years, we also see value in receiving the NZD IRS 2fwd 2yr."
- EMFX Portfolio Update: Enter ILS 1v2 steepener, a proxy 1y1y payer "Israel is one of the few emerging market countries whose unemployment rate has reached pre-crisis levels. Increasing inflation expectations and housing prices all suggest that the ILS front end is very vulnerable to the upcoming inflation releases. In addition, the 1v2 slope appears cheap by around 20bp on a number of metrics. To establish our view in a low-carry way we are putting USD10k to the 1v2 steepener. We also continue to recommend USD/ILS shorts, based on the higher probability of a faster pace of rates hikes."
- EMFX Portfolio Update: Fading RUB's temporary MXN disease "We recommend buying a RUB basket – selling 3m USD/RUB and EUR/RUB (entry 34.75, stop 35.25, target 33.65) – based on our explanations of recent underperformance and our identification of various changing dynamics. Inflation should provide a catalyst for the rouble as the trend caused by the negative food price shock appears to have reversed, partly due to the lagged effects of monetary and fiscal loosening during 2009. In the NDF space we see rate differentials on the rise after a period of contraction since Q4 2009, which would have turned off yield-hungry investors. Furthermore, REER overvaluation retracement, a declining external debt repayment schedule, relative equity market underperformance and upsides from any oil price increment are all supportive of the trade."
- FX Quant Insights: Pump up the volume "Volume data are often used in other asset classes (such as equities) to act as a further input into technical trading rules. In FX, they tend to be used less, largely because of the scarcity of volume data. The idea of using volume data is that they can be used to confirm technical moves. If there is a significant technical break higher and volume does not spike, we would conjecture that the move is relatively shallow. Conversely, a spike in volume would be supportive of the price action. Our focus is on combining on balance volume (OBV) with more traditional technical-based momentum style trading rules. In particular, we look at breakout style rules on OBV. Our volume-based basket has annualised returns of 3.9% and an information ratio of 0.66 since 2002."
Nomura Global FX Weekly 20100916
- EMFX Portfolio Update: Enter ILS 1v2 steepener, a proxy 1y1y payer "Israel is one of the few emerging market countries whose unemployment rate has reached pre-crisis levels. Increasing inflation expectations and housing prices all suggest that the ILS front end is very vulnerable to the upcoming inflation releases. In addition, the 1v2 slope appears cheap by around 20bp on a number of metrics. To establish our view in a low-carry way we are putting USD10k to the 1v2 steepener. We also continue to recommend USD/ILS shorts, based on the higher probability of a faster pace of rates hikes."
- EMFX Portfolio Update: Fading RUB's temporary MXN disease "We recommend buying a RUB basket – selling 3m USD/RUB and EUR/RUB (entry 34.75, stop 35.25, target 33.65) – based on our explanations of recent underperformance and our identification of various changing dynamics. Inflation should provide a catalyst for the rouble as the trend caused by the negative food price shock appears to have reversed, partly due to the lagged effects of monetary and fiscal loosening during 2009. In the NDF space we see rate differentials on the rise after a period of contraction since Q4 2009, which would have turned off yield-hungry investors. Furthermore, REER overvaluation retracement, a declining external debt repayment schedule, relative equity market underperformance and upsides from any oil price increment are all supportive of the trade."
- FX Quant Insights: Pump up the volume "Volume data are often used in other asset classes (such as equities) to act as a further input into technical trading rules. In FX, they tend to be used less, largely because of the scarcity of volume data. The idea of using volume data is that they can be used to confirm technical moves. If there is a significant technical break higher and volume does not spike, we would conjecture that the move is relatively shallow. Conversely, a spike in volume would be supportive of the price action. Our focus is on combining on balance volume (OBV) with more traditional technical-based momentum style trading rules. In particular, we look at breakout style rules on OBV. Our volume-based basket has annualised returns of 3.9% and an information ratio of 0.66 since 2002."
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