Derek Halpenny, currency strategist at Bank of Tokyo Mitsubishi UFJ, said the risks in USDJPY were clearly skewed to the downside. “Intervention, whether overt or covert will likely be required in order to forestall another test and breach of the record low of ¥75.35,” he said.
While the massive ¥9,091 billion intervention on October 31 stopped USDJPY breaking through the critical ¥75.00 level, it remains stubbornly close to that level. Some believe it is only covert intervention, or the threat of it, that is keeping USDJPY supported above ¥77.
The latest Ministry of Finance data shows that foreign investors purchased close to ¥15,000 billion in short-term money market instruments year to date in November as demand for safe haven assets rose, double the amount purchased during the same period in 2010.
The demand was fed as short-term yields in other major developed markets fell close to record lows, reducing the opportunity cost of investing in the short-end of the Japanese yield curve.
Coinciding with the upturn in demand for short-term assets in the last quarter, as the eurozone debt crisis escalated, has been increased selling of foreign assets on behalf of Japanese retail investors, a trend that does not seem to be slowing down.
Investment trust companies sold ¥437.5 billion worth of foreign bonds in November following the ¥181 billion worth of sales in October. Indeed this is the fourth month of net selling of foreign assets, and the longest period since the collapse of Lehman Brothers in 2008.
However, until the conditions fuelling the record buying of short-term money market instruments in Japan change, there is likely to be continued demand for these investments and USDJPY will move lower in the absence of further intervention.
“Breaking the steady safe-haven inflow into short-term securities and the risk aversion by the Japanese investors will be key in creating the conditions necessary for a sustained reversal in the downtrend in USDJPY” said Halpenny.