{"id":952,"date":"2012-03-26T14:00:00","date_gmt":"2012-03-26T14:00:00","guid":{"rendered":"http:\/\/starthostunlimiteddmffassi-ss.stackstaging.com\/bondworld.ch\/home\/sites\/20b\/7\/760c69a11c\/public_html\/investmentworld.ch\/index.php\/2012\/03\/26\/forex-markets-yen-90-is-back\/"},"modified":"2012-03-26T14:00:00","modified_gmt":"2012-03-26T14:00:00","slug":"forex-markets-yen-90-is-back","status":"publish","type":"post","link":"https:\/\/www.investmentworld.eu\/ch\/forex-markets-yen-90-is-back\/","title":{"rendered":"Forex markets: Yen: 90 is back"},"content":{"rendered":"<p style=\"text-align: justify;\">Downward  revision for the yen\u2019s profile. After a long phase of immobility, the  long-awaited downside reversal of the yen has suddenly begun. <span lang=\"EN-GB\">.<\/span>&#8230;<span lang=\"EN-GB\">&#8230;<\/span><strong><span lang=\"EN-GB\">&nbsp;<\/span><\/strong><span lang=\"EN-GB\">&nbsp;<\/span><span lang=\"en-GB\">&nbsp;<\/span><strong> <\/strong> <strong><span lang=\"EN-GB\">&nbsp;<\/span><\/strong><span lang=\"EN-GB\"> <\/span><span lang=\"EN-GB\">&nbsp;<\/span><span lang=\"en-GB\"> <\/span><span lang=\"en-GB\">&nbsp;<\/span><\/p>\n<p>  <!--more-->  <\/p>\n<ul> <\/ul>\n<ol><\/ol>\n<ol><\/ol>\n<ol><\/ol>\n<ol><\/ol>\n<hr \/>\n<p> <\/p>\n<p style=\"text-align: justify;\"><span style=\"font-family: arial,helvetica,sans-serif;\"><span style=\"font-size: 10pt;\"><strong>For professional investors and advisers only<\/strong><\/span><\/span><\/p>\n<hr \/>\n<div style=\"text-align: justify;\">\n<div>\n<div style=\"text-align: justify;\">The decisive factor in triggering the  movement was the BoJ\u2019s decision to adopt an inflation-targeting regime.  But will this be enough to hold the new course?<\/div>\n<div style=\"text-align: justify;\"><\/div>\n<div style=\"text-align: justify;\">We revise down the yen projections (see Tab.): regaining the USD\/JPY 90 level seems to be easier now.<\/div>\n<div style=\"text-align: justify;\"><\/div>\n<div style=\"text-align: justify;\">After  over six months in the waiting, during which the yen \u201cmoved\u201d between  USD\/JPY 76 and 78, the long-awaited downside reversal of the yen has  suddenly begun. The decisive factor in triggering the movement was the  BoJ\u2019s decision in February to adopt an inflation-targeting regime.<\/div>\n<div style=\"text-align: justify;\"><\/div>\n<div style=\"text-align: justify;\">But  will this be enough to hold the new course? We deem that both the choice  of the new strategy, and its timing, should help keep the downside  trend in place. The yen displayed strong downside resistance throughout  2011, and in the opening weeks of 2012. In this period, one of the main  factors that in some instances strengthened the yen, and in some other  limited or prevented its decline, was the phase of persisting risk  aversion2, which traditionally enhances the Japanese currency\u2019s role as a  safe haven, as was the case in the past for the Swiss franc, and in  some cases still is for the US dollar.<\/div>\n<div style=\"text-align: justify;\"><\/div>\n<div style=\"text-align: justify;\">However,  there are two additional aspects which may at least in part justify the  behaviour of the yen: (1) the dynamics and level of Japanese interest  rate\/government yields in relation to the United States\u2019, and (2) the  dynamics of inflation, i.e. lingering deflation.<\/div>\n<div style=\"text-align: justify;\"><\/div>\n<div style=\"text-align: justify;\">(1)  The levels and the interest rate\/yield differentials between Japan and  the United States, provided a good explanation of the trend of the  USD\/JPY exchange rate before the global economic and financial crisis of  2008, but continued to do so also subsequently (Fig. 1).<\/div>\n<div style=\"text-align: justify;\"><\/div>\n<p style=\"text-align: center;\"><img loading=\"lazy\" decoding=\"async\" alt=\"26032012_1\" src=\"images\/stories\/intesa weekly\/26032012_1.png\" height=\"151\" width=\"426\" \/><\/p>\n<\/p><\/div>\n<div> <\/p>\n<div style=\"text-align: justify;\">We  will consider here 2yr government bond yields, as they reflect growth  and inflation prospects, as well as the correlated monetary policy  expectations. Considering the period between the beginning of 2005 and  now, based on (average) weekly data, a correlation of 92% emerges  between the USD\/JPY exchange rate and the short-term yield differentials  between the United States and Japan. The estimates resulting from a  linear regression of the exchange rate on differentials have good  explicative capacity (fitting, Fig. 2). Proximity to zero of both US and  Japanese yields, as well as the former\u2019s upward stickiness (the Fed has  committed to keeping official interest rates close to zero at least  until around mid-2014), and the near-impossible prospect of the latter  dropping (they cannot drop any lower than zero: the average level  recorded in the first three weeks of March was 0.11%), not only  significantly limited the yen\u2019s potential downside, but also kept its  fluctuations within a narrow range for an extended period of time.<\/div>\n<div style=\"text-align: justify;\"><\/div>\n<\/p><\/div>\n<div style=\"text-align: justify;\">(2)  On the other hand, the yen was at length pushed upwards, towards an  appreciation, by Japanese consumer price dynamics in relation to US  prices (Fig. 3) and, in particular, by lingering deflation in Japan. An  approximate estimate of the correlation of purchasing power parity seems  in any case to suggest that, although the yen followed the direction  imposed by inflation differentials, lately (since shortly after the  beginning of 2010, Fig. 4) it exceeded a little compared to these as  well, i.e. it appreciated a little too much.<\/div>\n<div style=\"text-align: justify;\"><\/div>\n<p style=\"text-align: center;\"><img loading=\"lazy\" decoding=\"async\" alt=\"26032012_2\" src=\"images\/stories\/intesa weekly\/26032012_2.png\" height=\"147\" width=\"427\" \/><\/p>\n<div> <\/p>\n<div style=\"text-align: justify;\">Such  excessive upward bias is partially explained, as discussed above, by the  rise in risk aversion on the international markets. Given these  conditions, how could the yen reverse its course and start out on the  long-awaited depreciation trend? Not even the BoJ, with its direct  interventionson the currency markets (purchase of dollars against the  sale of yen) was capable of triggering the movement. However, it did  manage to contain the appreciation.<\/div>\n<div style=\"text-align: justify;\"><\/div>\n<div style=\"text-align: justify;\">In  February, however, the coup de theatre came: the BoJ announced the  adoption of an inflation targeting regime, adding that, given the need  to stably restore inflation to levels above zero, it would adopt further  expansive monetary policy measures. This official change in strategy,  announced at the right time, i.e. (A) when foreign trade data began to  outline the risk of a structural inversion of trade balances (from  historically positive to negative), also because of the exchange rate\u2019s  appreciation, and (B) when risk aversion had started to ease, in step  with a \u201cdefinitive\u201d solution to the Greek crisis being approached\u201d,  broke the yen\u2019s impasse at last, and triggered the long-awaited downside  reversal.<\/div>\n<div style=\"text-align: justify;\"><\/div>\n<div style=\"text-align: justify;\">As a  result, now conditions seem to be in place in terms of (i) fundamentals,  (ii) the market, (iii) and the institutional context, for the  depreciation of the Japanese currency to continue.<\/div>\n<div style=\"text-align: justify;\"><\/div>\n<div style=\"text-align: justify;\">However,  the downtrend, while clear in underlying terms, may at times prove  slower and more gradual, and\/or undergo interruptions due to lateral  movements. It should not be overlooked that rates are close to zero both  in Japan and in the United States, and that for the time being there  are still no indications of them possibly breaking the deadlock for at  least the next 12 months.<\/div>\n<div style=\"text-align: justify;\"><\/div>\n<div style=\"text-align: justify;\">In  any case, it is legitimate on a one-year horizon to assume a widening of  the short-term yield differential. Simulating a rise from 25bps at  present to 100bos in a year (Fig. 1), using the model based on yield  differentials described above, the result is that the yen may rise back  to (just) above the USD\/JPY 90 mark (Fig. 2). It cannot be ruled that  this may take place even before then. What\u2019s more, the fitted value  yielded by the yield differentials-based model suggests that even now,  at current levels, the yen is overvalued (Fig. 2: fitted value of 86.38  vs. actual value of 83.06 for the USD\/JPY exchange rate), and even the  purchasing power parity model already places the exchange rate at least  at USD\/JPY 90 (Fig. 4: estimated purchasing power parity value at 92.50  vs. actual value of 76.96 for the USD\/JPY exchange rate, in the last  reference month of the sample period considered).<\/div>\n<div style=\"text-align: justify;\"><\/div>\n<div style=\"text-align: justify;\">Lastly,  the prospect of the inflation differential curve (Fig. 3) reversing its  trend, albeit gradually and moderately, also thanks to the official  adoption of an inflation targeting regime by the BoJ, should make a not  negligible contribution to safeguarding the new trend of the yen.<\/div>\n<\/p><\/div>\n<\/p><\/div>\n<p> <\/p>\n<p style=\"text-align: justify;\"><span style=\"font-family: arial,helvetica,sans-serif;\"><strong> <\/strong><\/span><\/p>\n<hr \/>\n<p> <span style=\"font-family: arial,helvetica,sans-serif;\"><strong> <\/strong><\/span> <\/p>\n<p style=\"text-align: justify;\"><strong><span style=\"font-family: arial,helvetica,sans-serif;\">Appendix<br \/>An<\/span>alyst Certification<\/strong><br \/>The  financial analysts who prepared this report, and whose names and roles  appear on the first page, certify that: (1) The views expressed on  companies mentioned herein accurately reflect independent, fair and  balanced personal views; (2) No direct or indirect compensation has been  or will be received in exchange for any views expressed. Specific  disclosures: The analysts who prepared this report do not receive  bonuses, salaries, or any other form of compensation that is based upon  specific investment banking transactions.<\/p>\n<p><strong>Important Disclosures<\/strong><br \/>This  research has been prepared by Intesa Sanpaolo S.p.A. and distributed by  Banca IMI S.p.A. Milan, Banca IMI SpA-London Branch (a member of the  London Stock Exchange) and Banca IMI Securities Corp (a member of the  NYSE and NASD). Intesa Sanpaolo S.p.A. accepts full responsibility for  the contents of this report. Please also note that Intesa Sanpaolo  S.p.A. reserves the right to issue this document to its own clients.  Banca IMI S.p.A. and Intesa Sanpaolo S.p.A. are both part of the Gruppo  Intesa Sanpaolo. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. are both  authorised by the Banca d&#8217;Italia, are both regulated by the Financial  Services Authority in the conduct of designated investment business in  the UK and by the SEC for the conduct of US business.<br \/>Opinions and  estimates in this research are as at the date of this material and are  subject to change without notice to the recipient. Information and  opinions have been obtained from sources believed to be reliable, but no  representation or warranty is made as to their accuracy or correctness.  Past performance is not a guarantee of future results. The investments  and strategies discussed in this research may not be suitable for all  investors. If you are in any doubt you should consult your investment  advisor. <br \/>This report has been prepared solely for information  purposes and is not intended as an offer or solicitation with respect to  the purchase or sale of any financial products. It should not be  regarded as a substitute for the exercise of the recipient\u2019s own  judgement.<br \/>No Intesa Sanpaolo S.p.A. or Banca IMI S.p.A. entities  accept any liability whatsoever for any direct, consequential or  indirect loss arising from any use of material contained in this report.  <br \/>This document may only be reproduced or published together with the  name of Intesa Sanpaolo S.p.A. and Banca IMI S.p.A.. Intesa Sanpaolo  S.p.A. and Banca IMI S.p.A. have in place a Joint Conflicts Management  Policy for managing effectively the conflicts of interest which might  affect the impartiality of all investment research which is held out, or  where it is reasonable for the user to rely on the research, as being  an impartial assessment of the value or prospects of its subject matter.  A copy of this Policy is available to the recipient of this research  upon making a written request to the Compliance Officer, Intesa Sanpaolo  S.p.A., 90 Queen Street, London EC4N 1SA.<br \/>Intesa Sanpaolo S.p.A. has  formalised a set of principles and procedures for dealing with  conflicts of interest (\u201cResearch Policy\u201d). The Research Policy is  clearly explained in the relevant section of Banca IMI\u2019s web site  (www.bancaimi.com).<br \/>Member companies of the Intesa Sanpaolo Group, or  their directors and\/or representatives and\/or employees and\/or members  of their households, may have a long or short position in any securities  mentioned at any time, and may make a purchase and\/or sale, or offer to  make a purchase and\/or sale, of any of the securities from time to time  in the open market or otherwise. Intesa Sanpaolo S.p.A. issues and  circulates research to Qualified Institutional Investors in the USA only  through Banca IMI Securities Corp., 245 Park Avenue, 35th floor, 10167  New York, NY,USA, Tel: (1) 212 326 1230. Residents in Italy: This  document is intended for distribution only to professional investors as  defined in art.31, Consob Regulation no. 11522 of 1.07.1998 either as a  printed document and\/or in electronic form. Person and residents in the  UK: This document is not for distribution in the United Kingdom to  persons who would be defined as private customers under rules of the  FSA.<br \/>US persons: This document is intended for distribution in the  United States only to Qualified Institutional Investors as defined in  Rule 144a of the Securities Act of 1933. US Customers wishing to effect a  transaction should do so only by contacting a representative at Banca  IMI Securities Corp. in the US (see contact details above). <br \/><strong><br \/>Valuation Methodology<\/strong><br \/>Trading  Ideas are based on the market\u2019s expectations, investors\u2019 positioning  and technical, quantitative or qualitative aspects. They take into  account the key macro and market events and to what extent they have  already been discounted in yields and\/or market spreads. They are also  based on events which are expected to affect the market trend in terms  of yields and\/or spreads in the short-medium term. The Trading Ideas may  refer to both cash and derivative instruments and indicate a precise  target or yield range or a yield spread between different market curves  or different maturities on the same curve. The relative valuations may  be in terms of yield, asset swap spreads or benchmark spreads.<br \/><strong><br \/>Coverage Policy And Frequency Of Research Reports<\/strong><br \/>Intesa  Sanpaolo S.p.A. trading ideas are made in both a very short time  horizon (the current day or subsequent days) or in a horizon ranging  from one week to three months, in conjunction with any exceptional event  that affects the issuer\u2019s operations. In the case of a short note, we  advise investors to refer to the most recent report published by Intesa  Sanpaolo S.p.A\u2019s Research Department for a full analysis of valuation  methodology, earnings assumptions and risks. Research is available on  IMI\u2019s web site (www.bancaimi.com) or by contacting your sales  representative.<\/p>\n<p>Source: BONDWorld &#8211; Intesa Sanpaolo \u2013 Research Department<\/p>\n<p style=\"position: absolute; left: -10000px; top: 0px; width: 1px; height: 1px; overflow: hidden;\" id=\"_mcePaste\">Normal 0 14       MicrosoftInternetExplorer4<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Downward revision for the yen\u2019s profile. After a long phase of immobility, the long-awaited downside reversal of the yen has suddenly begun. .&#8230;&#8230;&nbsp;&nbsp;&nbsp; &nbsp; &nbsp; &nbsp;<\/p>\n","protected":false},"author":2,"featured_media":3459,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"telegram_tosend":false,"telegram_tosend_message":"","telegram_tosend_target":0,"footnotes":"","_wpscp_schedule_draft_date":"","_wpscp_schedule_republish_date":"","_wpscppro_advance_schedule":false,"_wpscppro_advance_schedule_date":"","_wpscppro_dont_share_socialmedia":false,"_wpscppro_custom_social_share_image":0,"_facebook_share_type":"","_twitter_share_type":"","_linkedin_share_type":"","_pinterest_share_type":"","_linkedin_share_type_page":"","_instagram_share_type":"","_medium_share_type":"","_threads_share_type":"","_google_business_share_type":"","_selected_social_profile":[],"_wpsp_enable_custom_social_template":false,"_wpsp_social_scheduling":{"enabled":false,"datetime":null,"platforms":[],"status":"template_only","dateOption":"today","timeOption":"now","customDays":"","customHours":"","customDate":"","customTime":"","schedulingType":"absolute"},"_wpsp_active_default_template":true},"categories":[22],"tags":[],"class_list":["post-952","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-makrooekonomische-daten"],"blocksy_meta":{"styles_descriptor":{"styles":{"desktop":"","tablet":"","mobile":""},"google_fonts":[],"version":6}},"_links":{"self":[{"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/posts\/952","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/comments?post=952"}],"version-history":[{"count":0,"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/posts\/952\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/media\/3459"}],"wp:attachment":[{"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/media?parent=952"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/categories?post=952"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/tags?post=952"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}