Time to close those short Jpy positions - even if the assetmarket rally continues. Heres why.

* Plenty of funding currencies around - leveraged accounts should diversify by shorting other low yielding currencies - buying the Jpy.

- According to the IMF, assets not held in domestic currencies amount to 8 TRN USD(16% ish of global GDP). Of those there is roughly a 1.5BN USD non domestic currency liability book which is funding higher yielding global assets. With a number of low yielding currencies such as the USD, SEK, GBP, CHF, AUD and the EUR there are appropriate alternatives. All of the above has moneymarket rates diverging less than 40 BP from the Jpy. The Usd has even 1mth LIBOR below the Jpy 1 mth LIBOR.

Liability managers targeting the lowest riskadjusted funding rate should adhere to these facts and adjust accordingly. Triggering Jpy buying.


-Japanese flows.
Japanese banks are reducing foreign claims abroad. Japanese banks foreign claims topped out during mid 2008 at 465 BN USD (7.2% of total Japanese bank assets), and have since turned decisively lower to 280 BN USD with no signs of recovering.

Why is that then? Well, with prime Japanese foreign markets turning into low yielders, the foreign attraction has waned vs domestic securities and yield curves.
The reduction of foreign bank claims and the increased investments into domestic Japanese assets means a stronger Jpy. Especially as those flows are increasingly turning into equity flows instead of bond ones. Equity flows are normally unhedged, triggering "pure" Jpy buying as assets are being reallocated into Japan.

- Market positioning
Interestingly, it seems both Japanese retail investors and leveraged accounts are short the Jpy. Should there be a move lower anytime soon, the Jpy strength will accelerate at some point, likely sub 130 in Eur/Jpy, alternatively 90 in Usd/Jpy, which in turn will trigger stops from these accounts. Implied volatility should be set to go higher, combined with a curve shifting towards an inverted slope.

- Downside risks to equity markets
While the the reallocation of funding currencies is initially likely to be a slow process, a drop in global equity markets could speed this process up. At this stage it would generate an accelerated pace of Jpy buying.


The main point here being; To get a stronger Jpy, we do not necessarily need a falling stockmarket. Although, it would, in bankers terms, be a bonus (sensitive word, that one).

The next question will of course be; which of the "new" funding currencies will get hit the most in the upcoming reallocation process?



* New positions and position changes

None. However, high probability Ill change my US equity holdings today.



As usual, good luck






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