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15 Apr 2013
Forex Flash: Yen replaces USD as key FX fulcrum - BBH
FXstreet.com (Barcelona) - Marc Chandler, Global Head of Currency Strategy at Brown Brothers Harriman notes that the Yen has replaced the dollar as they key fulcrum in the forex market presently.
He notes that yen bears have been frustrated by a series of developments and were unpleasantly surprised by news that the Japanese themselves were large sellers, not buyers, of foreign bonds in the first full week of the new fiscal year. In addition, they note that more often than not, since the BOJ's announcement, the yen has strengthened, not weakened, in the Tokyo trading session and the yen bears were unable to absorb the yen buying that capped the US dollar just below the psychologically important, JPY100 level.
Another factor he saw go against yen bears was the backing up of long-term Japanese interest rates, even though the BoJ is planning on buying some 70% of the amount of JGBs that the the government will issue until at least the end of next year seems counter productive to some. However, he sees that in the fundamental sense, the Q-squared policy, (Quantitative and Qualitative easing) works through raising inflation expectations. Furthermore, Chandler adds that nominal interest rates can be understood as a combination or real rates and a risk premium. he writes, “Since Japan has a yen printing press and a fiat currency (where the supply is not limited to gold or silver holdings), the risk premium is not that of a default. In fact, the cost of 5-year insurance, through the credit-default swap market, has actually fallen about 5 bp to 70 since the BOJ's announcement.”
He notes that yen bears have been frustrated by a series of developments and were unpleasantly surprised by news that the Japanese themselves were large sellers, not buyers, of foreign bonds in the first full week of the new fiscal year. In addition, they note that more often than not, since the BOJ's announcement, the yen has strengthened, not weakened, in the Tokyo trading session and the yen bears were unable to absorb the yen buying that capped the US dollar just below the psychologically important, JPY100 level.
Another factor he saw go against yen bears was the backing up of long-term Japanese interest rates, even though the BoJ is planning on buying some 70% of the amount of JGBs that the the government will issue until at least the end of next year seems counter productive to some. However, he sees that in the fundamental sense, the Q-squared policy, (Quantitative and Qualitative easing) works through raising inflation expectations. Furthermore, Chandler adds that nominal interest rates can be understood as a combination or real rates and a risk premium. he writes, “Since Japan has a yen printing press and a fiat currency (where the supply is not limited to gold or silver holdings), the risk premium is not that of a default. In fact, the cost of 5-year insurance, through the credit-default swap market, has actually fallen about 5 bp to 70 since the BOJ's announcement.”