DB FX Daily: Japan FX Demand Through the JPY Rally, GBP Shunned

[RTFX-Trading]

FX Daily: Japan FX Demand Through the JPY Rally, GBP Shunned

Japan FX Demand Through the JPY Rally, GBP Shunned

The yen rally had a significant impact on FX positions using measures such as IMM currency futures positions where non-commercial net shorts were almost halved by March 6th from the week previous. Other components of the DB FX Positioning index for JPY also showed a quick covering of yen shorts. In Japan however, the yen rally appears to have brought little in the way of position liquidation - rather it has simply seen a pause in foreign currency buying which had picked up in recent moths. The chart at left below tracks net positions for FX margin contracts traded on the Tokyo Financial Exchange through the end of last week. Focusing first on USD and EUR demand, the JPY rally late in February initially drew in dip buying in USD/JPY and EUR/JPY before a slight reduction of positions as USD/JPY traded below 118 with the net position now 13% lower in both currencies from February 28. In the other currencies there were also signs of position reduction with GBP positions cut by more than 40% since the end of February while AUD positions are 11% lower. Taken together, positions in GBP, AUD, CHF, CAD and NZD have not been increasing significantly over the past month whereas the same cannot be said for USD and EUR. Though the offshore positioning measures such as IMM data may show a healthy clear-out of short JPY positions, the FX positions held by margin traders onshore have yet to adjust significantly outside of GBP.

Other data sources for Japan financial flows show strong buying of foreign assets in February by investment trusts (see chart at right below) though overall capital flows for February as published by the Ministry of Finance yesterday showed some repatriation in early 2007 as other sectors offset the investment trust flow. Japan's Investment Trust Association also released February data today which continue to see increasing demand for money market and equity products and relatively less for bonds though they still have the largest share of investment trust funds above 60%. By currency, they noted more demand for AUD, CAD and NZD bonds but similar to the margin contract data showed falling demand for GBP bonds.