The Dash For Dollar Cash
Japanese investors were net sellers of foreign portfolio assets last week, after six consecutive weeks of outflows. Is this the end of the road for the USDJPY rally then? More generally, given Japanese investors are major holders of dollar-denominated bonds is the US dollar itself vulnerable here – especially given TIC data from the US Treasury also showed large foreign UST selling recently?
No, quite the opposite.
First, some of this ‘selling’ out of Japan was probably redemption-related. US$85 bn worth of UST notes and bonds matured last week.
Second, over the past several months Japanese investors have tended to sell UST as yields climb, only to buyback again when yields stabilise − that’s another key message from Chart 1.
Third, not just Japanese investors, but investors more generally appear to be moving out of UST but then staying in dollar cash. Falling OIS and Fed effective rates suggest this (Chart 2).
So USDJPY bulls need not be overly concerned by the overnight news flow. Rather, the widening spread between UST and JGB yields has created the conditions for further USDJPY upside. More generally, although US Treasury securities remain at risk of further selling from overseas, the dollar itself is unlikely to suffer from this. Indeed the opposite is happening – and for good reason − and we maintain our bullish dollar view.
Read the full report: UBS