Yen Demand at The Moment is as a Form of ‘Brexit’ Insurance - SocGen
Kit Juckes, Research Analyst at Societe Generale, notes that Japan’s Q1 GDP was revised up to show a 1.9% annualised growth rate in Q1.
“The same series is flat on a y/y basis so I’m not getting over-excited. USD/JPY has fallen by 5% since the start of 2006, but in real terms, it has risen by 40% and has fallen by 11% from its peak a few months ago). So the yen certainly isn’t ‘expensive’ in any absolute sense, though our FEER estimates of fair value are around 1.5, so the extreme cheapness of the yen on the basis has been mostly reversed this year.
My sense that it’s now expensive reflects a view that it’s moved too far relative to realm or nominal rates, and is inconsistent with capital flows out of Japan,. The market clearly disagrees with me and I’m not about to go on a protracted war with market trends, especially since it’s clear that one of the reasons for yen demand at the moment is as a form of ‘Brexit’ insurance.
Perhaps the real driver of a higher EUR/JPY (the trade that stands out most on relative real yields) could be the UK remaining in the EU on the June 23 vote. That however is a rather depressing though since what I want most of all is to look at trades that have nothing whatsoever to do with ‘Brexit’!”