Investment Research
USD/JPY
15 December 2008
Kasper Kirkegaard, Analyst, +45 45 13 70 18, [email protected]
Recent developments:
The Japanese Yen has appreciated strongly during the past year, as the global financial crisis and
economic slowdown have deepened. On a trade-weighted basis, JPY has appreciated close to 30%,
while USD/JPY has fallen around 20% in 2008 reaching a multi-year low of 88.53 on 12 December.
We attribute most of the JPY rally to the fall-out of financial markets causing a historical unwinding in
speculative short JPY positions.
Outlook:
We expect limited JPY strength from the current spot level and project USD/JPY at 88 in 3M, 92 in
6M, and 96 in 12M.
Key arguments:
The strong JPY appreciation during the financial crisis has, in our view, merely corrected a large imbalance built up in 2005-07 by vast speculative JPY funding, causing JPY to become undervalued.
We expect only a gradual improvement in risk sentiment and look for continued financial deleveraging
and high uncertainty to continue to add support to JPY, as more JPY funded positions are unwound.
Unwinding of JPY funded carry trades has lent great support to JPY, and while conventional measures of speculative FX positions, such as IMM and TFX data, suggest that most JPY shorts are taken
out (or turned into long positions), we expect that substantial short positions could still be in place via
more complex products (e.g. PRDCs).
Inflation in Japan is expected to remain below that in the US, lending long-term support to JPY.
JPY has historically appreciated during a global economic slowdown (FX Strategy, 10 December 07).
A pick-up in risk appetite, causing a rally in global stock markets, would weigh heavily on JPY.
The domestic economic outlook remains very grim in Japan and we expect JPY to continue to receive
no support from relative economic growth.
Key risks:
At the current spot level and given the recent rapid JPY appreciation, the probability of intervention
from the Bank of Japan has most likely increased significantly. The Bank of Japan last intervened (selling JPY against USD) in early 2004.
Things to look for:
JPY is a safe-haven currency and tends to strengthen when risk-appetite abates (e.g. equity markets
fall). The relation between USD/JPY and risk sentiment varies over time and is currently very high.
Before financial markets normalise and the current elevated uncertainty fades, we would be hesitant
to add JPY shorts and would prefer to be long JPY – especially against EUR.
FX TWO-PAGERS
100
100
90
90
80
80
70
70
60
60
50
Jan
Apr
Jul
08
Oct
Jan
90 pct. confidence region
50 pct. confidence region
Apr
Jul
09
50
Oct
+/- 2std deviations
USD/JPY spot
Spot (incl. DB forecast)
Forward
Short-term financial model drivers
USD/JPY
1
120
USD/JPY
USD/JPY
1
0
110
110
-1
-1
105
105
-2
-2
100
100
-3
-3
95
95
90
90
-4
-4
85
Dec Feb
07
85
Jun
Spot
Aug
Oct
Dec
Nov
08
Carry-to-risk (pos. coeff.)
3M-1Y Forward spread (pos. coeff.)
4.0
USD/JPY >>
3.5
percent
USD/JPY
Devi
130
5.5
125
5.0
120
4.5
115
4.0
percent
<< 3M-1Y forward spread
2.5
105
2.0
100
2.5
1.5
95
2.0
1.0
Jan May
90
1.5
90
May Sep
07
Jan
May Sep
08
<< USD GDP growth - JPY GDP growth
USD/JPY >>
3.5
110
Jan
3.0
92
0.3
0.3
0.1
0.1
-0.1
-0.1
-0.3
Dec Feb
07
-0.3
Crude Oil
Source: Reuters EcoWin and Danske Bank calculations
DANSKE BANK
Dec
percent (billions)
0.5
2-year swap spread
04
06
08
USD/JPY
JPY bn (inverted)
400
percent
0.5
MSCI world equity index
02
Devi
200
Oct
00
Japanese trade balance
0.7
Aug
98
Source: Reuters Ecowin and Danske Bank calculations
0.7 Correlation coefficient
08
96
.
USD/JPY correlations
Jun
94
170
160
150
140
130
120
110
100
90
80
.
Source: Reuters EcoWin and Danske Bank calculations
Apr
USD/JPY
%-point (3 year MA)
3.0
Sep
06
.
USD/JPY and real GDP growth
percent
%
Log MSCI world (pos. coeff.)
Source: Reuters EcoWin and Danske Bank calculations
USD/JPY and relative interest rates
4.5
08
.
Source: Reuters EcoWin and Danske Bank calculations
5.0
-5
Dec
percent
Model
-5
0
USD/JPY spot >>
150
140
600
130
800
120
110
1000
100
1200
1400
90
160
percent
Apr
percent
115
percent
percent
USD/JPY
+/- 2 std
percent
.
Source: Reuters EcoWin and Danske Bank calculations
Note: 10-year rolling regression window
Short-term financial model estimate
115
PPP estimate (CPI ; 1983 -)
.
Source: Reuters EcoWin and Danske Bank calculations
Please note that confidence regions are derived from option prices
and do not reflect Danske Bank forecasts
120
350
300
250
200
150
100
50
0
percent
percent
110
percent
USDJPY
110
percent
USD/JPY
USD/JPY PPP estimate (CPI based)
350
USD/JPY
USD/JPY
300
250
200
150
100
50
0
84 86 88 90 92 94 96 98 00 02 04 06 08
120
percent
DB forecast and option-implied probabilities
120
<< Japanese trade surplus (12 mth MA)
92
94
96
98
00
02
04
06
08
90
80
.
.
Source: Reuters Ecowin and Danske Bank calculations
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FX TWO-PAGERS
FX Research
John Hydeskov
Kasper Kirkegaard
Stefan Mellin
Sverre Holbek
Thomas Andersen
Klaus Ikast
Kim Cramer Larsson
G10
G10
SEK
Option strategies
Hedging strategies
Technical analysis
Technical analysis
+45 45 12 84 97
+45 45 13 70 18
+46 8 568 805 92
+45 45 14 88 82
+45 45 12 84 96
+45 45 12 84 99
+45 45 12 85 01
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
Disclosure
This report has been prepared by Danske Research, which is part of Danske Markets, a division of Danske Bank. Danske Bank is under supervision by the Danish Financial Supervisory Authority. The authors of the report are Sverre Holbek, Analyst and Kasper Kirkegaard, Analyst.
Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of high quality research based on research objectivity and independence. These procedures are documented in the Danske Bank Research Policy. Employees within the Danske
Bank Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be
re-ferred to Research Management and to the Compliance Officer. Danske Bank Research departments are organised independently from
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or dept capital transactions.
Danske Bank research reports are prepared in accordance with the Danish Society of Investment Professionals’ Ethical rules and the Recommendations of the Danish and Norwegian Securities Dealers Associations.
Financial models and/or methodology used in this report
Risk warning
Major risks connected with recommendations or opinions in this report, including as sensitivity analysis of relevant assumptions, are stated
throughout the text.
Expected updates
FX Market Update is published every Tuesday.
First date of publication
Please see the front page of this research report for the first date of publication. Price-related data are calculated on the basis of the price as
of 30 October 2008 10:15.
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