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29 Apr 2013
Forex Flash: JPY positioning in focus - Societe Generale
FXstreet.com (Barcelona) - Sebastien Galy, Senior FX Strategist at Societe Generale has taken a look at the recent positioning data for JPY and notes that the currency fell without much, if any, investment flows out of Japan.
He feels that this leaves Japanese investors less exposed to a consolidation of the yen, while foreign investors are short JPY but not excessively so. The same holds true for hedge funds. He sees that the exposure is indirect as both Japanese and foreign investors are significantly exposed to the Nikkei, and a correction in the Nikkei would lead the JPY higher. In terms of overall position, he notes that Japan has historically invested primarily in Fixed Income in the US, EU (UK, Netherlands, France & Belgium), LatAM (Brazil), and far less in Asia (South Korea). Adding equities, and the flows are averall in the US, EU and LatAM.
In terms of recent flows, he notes that in the past few weeks, japanese investors have been repatriating a mix of foreign equities and bond investments. He writes, “The allocation per currency is still unknown but signs suggest they maintained or increased their well-performing European bond positions, but may have preferred a steeper JGB curve to a steeper US Treasury one. This bias for the home market is known and has actually led to periods of JPY appreciation in the past when both curves were rising. This preference is one Japanese insurers have made in the past.”
Finally, looking at asset allocation, he comments that Japanese investors have seen large scale gains on their JGB, Nikkei and foreign portfolios, partly unhedged. He feels that it seems that they have allowed their portfolios to stay overweight risk relative to their benchmarks rather than rebalance. This has probably led them to be at the top of their risk-taking mandate. He feels that taking an additional FX risk may have been seen as not adding much to their risk reward. He finishes by writing, “Many Japanese life insurers have released their investment programs, suggesting they will invest more outside of Japan. A simple look at their portfolios suggests that Asian bond markets are deeply underweight and Japan already announced that it would invest part of its foreign reserves in ASEAN currencies.”
He feels that this leaves Japanese investors less exposed to a consolidation of the yen, while foreign investors are short JPY but not excessively so. The same holds true for hedge funds. He sees that the exposure is indirect as both Japanese and foreign investors are significantly exposed to the Nikkei, and a correction in the Nikkei would lead the JPY higher. In terms of overall position, he notes that Japan has historically invested primarily in Fixed Income in the US, EU (UK, Netherlands, France & Belgium), LatAM (Brazil), and far less in Asia (South Korea). Adding equities, and the flows are averall in the US, EU and LatAM.
In terms of recent flows, he notes that in the past few weeks, japanese investors have been repatriating a mix of foreign equities and bond investments. He writes, “The allocation per currency is still unknown but signs suggest they maintained or increased their well-performing European bond positions, but may have preferred a steeper JGB curve to a steeper US Treasury one. This bias for the home market is known and has actually led to periods of JPY appreciation in the past when both curves were rising. This preference is one Japanese insurers have made in the past.”
Finally, looking at asset allocation, he comments that Japanese investors have seen large scale gains on their JGB, Nikkei and foreign portfolios, partly unhedged. He feels that it seems that they have allowed their portfolios to stay overweight risk relative to their benchmarks rather than rebalance. This has probably led them to be at the top of their risk-taking mandate. He feels that taking an additional FX risk may have been seen as not adding much to their risk reward. He finishes by writing, “Many Japanese life insurers have released their investment programs, suggesting they will invest more outside of Japan. A simple look at their portfolios suggests that Asian bond markets are deeply underweight and Japan already announced that it would invest part of its foreign reserves in ASEAN currencies.”