Increasing speculation Japanese investors’ are shifting asset allocations in favour of offshore assets is negative for the Yen

By Mike Jones

NZD

Small gains in global equity markets and another strop higher in NZD/JPY has seen the NZD/USD start the week on the front foot. After opening the week around 0.8400, the currency climbed to almost 0.8470 overnight.

The TWI, meanwhile, has hit another post-float high, this time above 78.00.

A bit of hawkish sentiment from RBNZ Deputy Governor Spencer on the NZ housing market yesterday produced a brief flurry of excitement in local markets.

NZ swap yields nudged higher into the close (2-year yield from 2.83% to 2.87%), helping to set the NZD/AUD on a path higher.

At around 0.8130, the cross is now creeping into the top end of our model’s 0.7950-0.8150 short-term ‘fair-value’ range.

Spencer’s speech made it clear the RBNZ is paying closer attention to the housing market, from both a monetary policy and financial system perspective.

“If the housing market momentum continues and adds inflationary pressures, a monetary response would become more likely. Macro-prudential tools…are not as powerful as monetary policy.” It doesn’t get much clearer than that.

Offshore, currency markets remain besotted with the JPY. Widespread JPY weakness continued overnight, as speculative investors place bets on ‘carry trade’ activity starting to ramp up in Japan (selling the JPY to buy higher yielding offshore assets).

The NZD/JPY was launched from 82.50 to almost 84.00 as a result. The trend for a weaker JPY shows no sign of slowing down, and we have bumped up our year-end NZD/JPY forecast to 89.00. The risk is for an overshoot.

Looking ahead, there is a smattering of local event risk due today that could be important for the NZD. We expect the Q1 QSBO business survey (10:00am) will be upbeat, signalling core growth of at least average.

What’s more, the survey’s capacity indicators will probably signal more inflation risk than is apparent in the headline CPI.

Across the Tasman, there is the NAB business confidence survey to watch for at 1:30pm. Of interest will be whether the stabilisation evident in other Australian forward indicators is reflected in the March survey.

There’s also the Chinese CPI at 1:30pm. A cooling from 3.2%y/y to 2.5% is expected. Anything north of this would likely fan worries about possible Chinese policy tightening later in the year, weighing on the NZD and AUD.

---------------------------------------------------------------------------------------------------------------------

To subscribe to our free daily Currency Rate Sheet and News email, enter your email address here.

------------------------------------------------------------------------------------------------------------------

Majors

JPY weakness remains the dominant theme in currency markets. In an otherwise fairly directionless night, gains in most JPY crosses provided a boost to the major currencies, including NZD, AUD, EUR, and CAD. The GBP, in contrast, has again underperformed.

USD/JPY has climbed to a fresh 4-year high above 99.00 this morning as details of the Bank of Japan’s new bond buying scheme dribble out to the market (¥1t of 5-10 year JGBs and ¥200b of 10+ year JGBs).

Perhaps more negative for the JPY though is increasing speculation about Japanese investors’ shifting asset allocation in favour of offshore assets.

In other words, a return of the ‘carry trade’ that dominated parts of 2007 and 2008, and pushed USD/JPY above 120 and NZD/JPY above 95.00.

We have bought forward the timing of our forecast for USD/JPY to surpass ¥100 into the current quarter and now forecast the pair at ¥110 by mid-2014.

The risk is that the latter level is achieved sooner than we currently project. This is particularly so if Japanese institutional investors start to lighten their hedge ratios on overseas bond holdings.

Gains in EUR/JPY helped lift the EUR/USD back above 1.3000 overnight. A solid 0.5%m/m increase in February German industrial production (+0.3% expected) also bolstered EUR sentiment.

However, not only were there negative revisions to back data (January from flat to -0.6%), but forward looking indicators have been much less positive.

Stuttering European economic momentum and ongoing political uncertainty saw us revise down our EUR/USD forecasts yesterday. Our Q2 forecast was trimmed from 1.3300 to 1.2700.

A late rally in US stocks this morning has seen most of the major equity indices finish the night in positive territory (S&P500 +0.3%). Note that Alcoa kicks off the Q1 US corporate earnings season this morning after the close.

Analyst expectations have been dialled back such that just 0.8%q/q revenue growth is now expected for S&P500 companies. With weak/flattish earnings already priced in, it will take some really nasty numbers to kickstart any notable equity market correction.

This morning’s (11:15am NZT) speech from the Fed’s Bernanke on “Stress-Testing Banks” is likely to be of only passing interest to markets.

Event Calendar:

9 April: NZ QSBO; US Fed’s Bernanke speaks; NZ QVNZ house prices; AU NAB business confidence; CH CPI; US Fed’s Lacker & Lockhart speak;

10 April: NZ ECT data; AU RBA’s Kent speaks; AU consumer confidence; CH trade balance; US FOMC minutes;

11 April: NZ PMI; AU employment; EU German CPI; US Fed’s Plosser speaks;

12 April: NZ food prices; EU Eurogroup meeting; US retail sales; US Fed’s Rosengren speaks.

All its research is available here.