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The Fall and Rise of The USD/JPY: Evariste Lefeuvre
The Fall and Rise of The USD/JPY: Evariste Lefeuvre
4/6/2010 –
Evariste Lefeuvre
Summary: the fall and rise of the USD/JPY
The sharp fall in the USD/JPY was first driven by huge unwinding of yen-
funded carry trade positions in the midst of the financial crisis. The
downward momentum was somehow puzzling and could be mostly
explained by 1/ some dollar skepticism in late 2009 2/ credit flows in yen
We show here that those factors were temporary and that there is no
room for a clear explanation of USD/JPY fluctuation as the economy is
plagued by quasi-ZIRP and deflation since almost a decade and posts a
structurally positive current account position
In both cases, the 2/3 year forecasts are clearly on the upside with Natixis
expectations ranging in the 110/115 bracket…
2 12/07/21
USD/JPY: structural analysis
0.25
2.0
– Most of the changes in USD/JPY are 1.5 0.00
driven by the low end of the balance So urces : Blo o mb erg
1.0 -0.25
of payment: capital and credit
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
flows…
3 12/07/21
USD/JPY: main drivers
USD/JPY and SP 500
130 1600
120 1400
110 1200
4.5
110 4.0
100 3.5
US D/J P Y
3.0
US 10-y yie ld - R HS
90
2.5
So urces : Blo o mb erg
80 2.0
04 05 06 07 08 09 10
4 12/07/21
USD/JPY: carry trade syndrome
Japan: credit flow s and carry trade return
2 105
100
– Strong unwinding starting in mid-2008 1
95
flows -1
85
3.5 3.5
90 Capital outflow s -2
So urces : BOJ
3.0 3.0 So urces : Dat as tream, NATIXIS, BOJ
80 -3
A-08 J-08 O-08 J-09 A-09 J-09 O-09 J-10
02 03 04 05 06 07 08 09
5 12/07/21
Reconciling the data: tentative model
Building block:
140
• Main factors :
– US 10-y yield
130
USDJPY
UP_BOUND
– VIX 120 LOW _BOUND
– Main direction: up 02 03 04 05 06 07 08 09 10 11 12 13
6
GT_10 1,600
FDTR BRENT
5
VIX
1,400
SPX
160
4
1,200
120
3
1,000
2 80 800
1 40 600
0
02 03 04 05 06 07 08 09 10 11 12 13 0
02 03 04 05 06 07 08 09 10 11 12 13
6 12/07/21
USD/JPY Forecasts by Natixis
VIX
1,400
SPX
160
• Main factors : 1,200
120
1,000
– US 10-y yield pushed up by
fiscal deficits 80 800
– VIX
40 600
– S&P 500
– Libor (and O/N) spreads – FED 0
0
02 03 04 05 06 07 08 09 10 11 12 13
7 12/07/21
USD/JPY Forecasts by Natixis
140 USDJPY
UP_BOUND
LOW_BOUND
130
120
110
Towards 110
100
90
80
02 03 04 05 06 07 08 09 10 11 12 13
8 12/07/21