Intraday Market Thoughts

Biggest & Least Mentioned FX Development

by Ashraf Laidi
May 6, 2020 13:36

One of the least mentioned developments in FX is the surge in the Japanese yen. Just as traders are busy discussing the US dollar's unique funding feature, the yen rises above it and the rest. Year-to-date, JPY is the only currency higher against the greenback, up 2.3%. Most interestingly, USDJPY is down for the 6th consecutive month, the longest monthly losing streak since 2010, when the BoJ had to intervene to stabilize its currency.

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Biggest & Least Mentioned FX Development - Usdjpy Changes May 6 2020 (Chart 1)

We also know the yen remains the oldest form of FX carry trades, a development that has been especially propagated since the Fed's efforts to contain bond yields. As the Fed spends trillions to shore up liquidity in FX and the US treasury market, yield-seeking Japanese investors see no point in clinging for US govt coupons.

As JPY net longs vs USD hit 4-year highs, the divergence between USD Index and USDJPY continues to deepen. Some say it is matter of time Japan's that debt bubble explodes and sends USDJPY to 140 (they've been assaying for the past 15 years). One major difference between Japan's debt set-up and that of the US is that Japanese debt is wholly owned by domestic investors, whereas the US has to rely on its exorbitant privilege (ability to issue the world's reserve currency to pay for imports and capital). There is no need to point out that Japan has a current account surplus equal to 3.6% of GDP vs a deficit -2.3% of GDP for the US. Finally, the Premium Insight's trade of shorting USDJPY at 108.60 is more than 250-pips in the green...and remains  open.


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