Short Note on Falling Yen

The yen fell in the North American session amid speculation around the 30-year US Treasury bond auction that Japanese institutional investors were beginning to implement this year's global allocation.  The indirect bidders at the auction, which can include foreign institutions accounted for more of the buying that they have averaged in recent months.  There has been market talk of central bank intervention in recent days in several Asian countries and some of these proceeds may have also been recycled into the US Treasury market.

Even though benchmark 10-year yield was little changed on the day, some participants emphasized Chicago Fed's Evans, an outspoken dove, suggesting that if the jobs data holds up, and weekly initial jobless claims (and the smoothed 4-week average) have fallen to the new cyclical lows (reported earlier Thursday).  A financial press story also played up the possibility that the Fed tapers its long-term asset purchases sooner than many (including ourselves) expect.   Despite the little change, the 1-2 bp higher yield extends the yield rise since the start of the month to 20 bp.

The Japanese data reported on Friday encouraged Tokyo to extend the yen's losses.  Weekly MOF data shows that Japanese investors bought bonds last week and the week before (the latter had not been reported due to the Golden Week holiday).  Japanese investors bought JPY310 bln of foreign bonds last week and JPY204 bln the previous week.  It is the first time since mid-December that Japanese investors bought foreign bonds for two consecutive weeks and ends a 7-week selling streak.  

For their part, foreign investors who have bought Japanese stocks almost every week this year save one through mid-April, for a total of around $64 bln, twice last year's pace, have turned to modest sellers two of the past three weeks.

Japan also reported its biggest current account surplus in a year at JPY1.25 trillion in March.  This was not driven by the trade account, which remained in deficit (~JPY220 bln).  Rather the depreciation of the yen is boosting Japanese income from foreign investment.    The investment income was a net surplus of JPY1.71 trillion, up from JPY1.41 trillion in February and JPY1.5 trillion March 2012.

Japan also reported a increase in bank lending in April.  The 2.1% year-over-year rise is the highest since July 2009.  It has been steadily rising since last April.  It appears to be a function of primarily reconstruction-related lending, but also some lending linked to foreign direct investment.

En toto, the data gives the yen bears more ammunition to extend the breakout that took place in North America.  The JPY100 level, which provided a formidable cap in recent weeks (and may have encouraged a culling of a third of the gross short yen CME futures position), should now offer support.  The next immediate target is the JPY101.40 area.  The technical measuring objective of the triangle pattern traced out seems nearer JPY105.

Finally note that there is a G7 meeting Friday and Saturday.  It is not clear that statement will be forthcoming, but no doubt the developments in the foreign exchange market will be discussed.  What began out as a weak yen story has morphed into a strong dollar meme.