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13 Apr 2015
EUR/JPY: further declines ahead – Nomura
FXStreet (Barcelona) - Jens Nordvig, Global FX Strategist at Nomura, suggests selling EUR/JPY and EUR/USD as Eurozone fixed income outflows start to dominate again.
Key Quotes
“the decline in Eurozone yields is relentless, and suggests that fixed income outflows will remain very large for the foreseeable future. The ECB is still in the early stages of its QE program and there will be no reason any time soon for the ECB to adjust the key parameters. In other words, the trend is more likely to continue than reverse.”
“In relation to EURJPY, we note that the last few months have seen very dramatic shifts in rate differentials between the Eurozone and Japan. This shift has been most dramatic in the long end of the curve, where Eurozone vs. Japan differentials have shifted dramatically into negative territory for both German and French instruments.”
“Since Japanese fixed income holdings in the Eurozone are very significant (in the region $750bn, when excluding T-bills), the yield moves could have medium-term flow implications, and may affect EURJPY for a sustained period of time, since it will take time for asset managers to reallocate (the flow data does not show any sizeable outflows yet).”
“In addition, euro area investors may view Japanese bonds as more attractive than local bonds now. In fact, Q4 euro area IIP data shows euro area investors purchased EUR16bn of Japanese securities (bonds and equities, excluding valuation effects) in Q4, at the highest pace in four quarters.”
“Q4 IMF COFER data also shows strong foreign investment in JPY, while reserve managers did not add EUR exposures even amid EUR depreciation. Meanwhile, we don’t think BOJ policy is about to be changed in the short-term.”
“Against this background, we are inclined to position for grinding downside in both EURUSD and EURJPY over the coming months.”
Key Quotes
“the decline in Eurozone yields is relentless, and suggests that fixed income outflows will remain very large for the foreseeable future. The ECB is still in the early stages of its QE program and there will be no reason any time soon for the ECB to adjust the key parameters. In other words, the trend is more likely to continue than reverse.”
“In relation to EURJPY, we note that the last few months have seen very dramatic shifts in rate differentials between the Eurozone and Japan. This shift has been most dramatic in the long end of the curve, where Eurozone vs. Japan differentials have shifted dramatically into negative territory for both German and French instruments.”
“Since Japanese fixed income holdings in the Eurozone are very significant (in the region $750bn, when excluding T-bills), the yield moves could have medium-term flow implications, and may affect EURJPY for a sustained period of time, since it will take time for asset managers to reallocate (the flow data does not show any sizeable outflows yet).”
“In addition, euro area investors may view Japanese bonds as more attractive than local bonds now. In fact, Q4 euro area IIP data shows euro area investors purchased EUR16bn of Japanese securities (bonds and equities, excluding valuation effects) in Q4, at the highest pace in four quarters.”
“Q4 IMF COFER data also shows strong foreign investment in JPY, while reserve managers did not add EUR exposures even amid EUR depreciation. Meanwhile, we don’t think BOJ policy is about to be changed in the short-term.”
“Against this background, we are inclined to position for grinding downside in both EURUSD and EURJPY over the coming months.”