The fall and rise of the USD/JPY

4/6/2010 –
Evariste Lefeuvre
 Summary: the fall and rise of the USD/JPY

The sharp fall in the USD/JPY was first driven by huge unwinding of yen-
funded carry trade positions in the midst of the financial crisis. The
downward momentum was somehow puzzling and could be mostly
explained by 1/ some dollar skepticism in late 2009 2/ credit flows in yen

We show here that those factors were temporary and that there is no
room for a clear explanation of USD/JPY fluctuation as the economy is
plagued by quasi-ZIRP and deflation since almost a decade and posts a
structurally positive current account position

We draw our main forecasts on a macro/asset model based on data for

which forward data are available. It enables us to compare our view with
that of the market

In both cases, the 2/3 year forecasts are clearly on the upside with Natixis
expectations ranging in the 110/115 bracket…

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 USD/JPY: structural analysis

• A structurally positive current account

Japan: current account
balance
Tra de B a la nc e - RHS
C urre nt Ac c o unt Ba la nc e (% o f GDP )
– Reflection of high domestic saving 5.0 1.50

that may wane with the ageing of the 4.5 1.25

population (life cycle). 4.0
1.00
3.5
0.75
– This pattern should be less and less 3.0
yen positive. 2.5
0.50

0.25
2.0
– Most of the changes in USD/JPY are 1.5 0.00
driven by the low end of the balance So urces : Blo o mb erg
1.0 -0.25
of payment: capital and credit
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
flows…

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 USD/JPY: main drivers
USD/JPY and SP 500

130 1600

120 1400

110 1200

• As macro factor are not reliable, cross 100 US D/J P Y

S P 500 - R HS
1000

asset analysis provide some insight 90 800

So urces : Blo o mb erg

80 600
– Correlation with risk assets (VIX, S&P 04 05 06 07 08 09 10

USD/JPy and US 10-y rates

– The USD/JPY T-note yield conundrum
130 5.5

– DANGER: Correlations breaks 120

5.0

4.5
110 4.0

100 3.5
US D/J P Y
3.0
US 10-y yie ld - R HS
90
2.5
So urces : Blo o mb erg
80 2.0
04 05 06 07 08 09 10

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 USD/JPY: carry trade syndrome
Japan: credit flow s and carry trade return

• Yen funded carry trade strategies plagued the Lo a ns

relationships 3 C a rry trade to t re t. - R HS 110

2 105

100
– Strong unwinding starting in mid-2008 1
95

– Open question regarding the reversal in loan

0
90

flows -1
85

– Especially since carry trade for AUD/JPY -2

So urces : Blo o mb erg , BOJ
80

remained very alluring -3

02 03 04 05 06 07 08 09
75

Japanese banks external asssets

Japan: credit flow s and USD/JPY
denom inated in Yen (trill)
140 3
C redits - R HS
5.5 5.5 US D/J P Y
130 2
5.0 5.0
120 1
4.5 4.5
110 0
4.0 4.0
100 -1

3.5 3.5
90 Capital outflow s -2
So urces : BOJ
3.0 3.0 So urces : Dat as tream, NATIXIS, BOJ
80 -3
A-08 J-08 O-08 J-09 A-09 J-09 O-09 J-10
02 03 04 05 06 07 08 09

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 Reconciling the data: tentative model
Building block:
140
• Main factors :
– US 10-y yield
130
USDJPY
UP_BOUND
– VIX 120 LOW _BOUND

– S&P 500 110

– Libor (and O/N) spreads

– Oil prices (dollar negative)
100

• A forward based scenario: 90

– Most input drawn from market data 80

– Main direction: up 02 03 04 05 06 07 08 09 10 11 12 13

6
GT_10 1,600
FDTR BRENT
5
VIX
1,400
SPX
160
4
1,200

120
3
1,000

2 80 800

1 40 600

0
02 03 04 05 06 07 08 09 10 11 12 13 0
02 03 04 05 06 07 08 09 10 11 12 13

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USD/JPY Forecasts by Natixis

A more aggressive (our) view: BRENT

1,600

VIX
1,400
SPX
160
• Main factors : 1,200

120
1,000
– US 10-y yield pushed up by
fiscal deficits 80 800

– VIX
40 600

– S&P 500
– Libor (and O/N) spreads – FED 0

exit much more aggressive 02 03 04 05 06 07 08 09 10 11 12 13

– Oil prices (dollar negative) – to

6
target 100 in 2 years GT_10
FDTR
5

0
02 03 04 05 06 07 08 09 10 11 12 13

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USD/JPY Forecasts by Natixis

140 USDJPY
UP_BOUND
LOW_BOUND
130

120

110
Towards 110

100

90

80
02 03 04 05 06 07 08 09 10 11 12 13

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