USD/JPY: Modest Support from Buying on Dips but Upside Capped – Deutsche Bank
Taisuke Tanaka, Strategist at Deutsche Bank, notes that the major lifers
have unveiled their investment strategies for FY3/17 and they face a
situation in which securing yields in excess of the assumed rate of
return is challenging under the negative interest rate policy.
“Nevertheless, the environment is not conducive to simply increasing exposure to risky equity and forex investment. In pursuit of safely gaining as high positive yields as possible, they are likely to continue selecting superlong JGBs, corporate bonds, hedged foreign bonds (especially US and European non-government bonds, European peripheral bonds), and other investments and loans.
It is likely that the overall allocation to foreign bond investment can be several trillion yen. However, hedged foreign bonds which are neutral for JPY should be preferred. Unhedged foreign bonds (bonds as a forex investment) will likely be bought cautiously, waiting for deeper dips and suchlike. We doubt the lifers will chase upside when the USD/JPY is rising toward 115 or above.
Conversely, we expect the lifers to calmly sell USD for hedge if the USD/JPY rallies because yen appreciation since February has damaged their unhedged foreign bond holdings. In other words, lifers' foreign bond purchases will only provide extremely modest support for USD/JPY, but are very likely to weigh on USD/JPY upside.”