What About that Yen?

Overshadowed by developments in the US and Europe, the Japanese yen has been largely sidelined and its movement more a function of the other side of the trade, like the euro, dollar and even the Australian dollar. The dollar appears poised to trade higher, with a move back toward the upper end of its Q4 range in the JPY84 area.

This will require a change of drivers. Japanese investors are not the prodigious overseas investors that they were from mid-May through mid-Nov last year. In that period, Japanese investors were putting an average of JPY886 bln (~$11 bln) a week overseas. Since then Japanese investors have been repatriating an average of about JPY63 bln a week.

As the fiscal year end approaches at the end of next month, Japanese investors should not be expected to be large exporters of capital. The sensitivity of the dollar-yen rate to US-Japanese interest rate differentials appears to have slackened recently, but it is likely to revert back as the differential on the 10-year rises toward 240 bp and is at the highest level since last May. The 2-year differential is a little above 53 bp and is approaching its best level since last June.

Japanese exporters are thought to be helping cap the greenback near JPY82 presently, but this more likely to slow the move expected here, not prevent it.