March Madness
Given the recent surge in volatility, one has to wonder whether the yen momentum is likely to continue or peter out like dust in the wind. Other than the carry trade unwind theory, there are factors at that play that need to be taken into consideration. Notably, this brings up the topic of Japanese fiscal year repatriation. A notion that is usually denounced as a nonstarter, a yen trader cannot dismiss the simple occurrence that usually takes place around March 31st (fiscal year end) and September 30 (half year end).
Here, both corporate and individual investors move out of investments abroad to offset losses domestically, for tax purposes and other accounting related effects. The capital flows that repatriate back into Japan help to boost the underlying spot as demand spikes. But does this really help the yen to strengthen during the month of March? If so, what are some signs that this anomaly occurs?
Looking To The Past
Lets take a look at some prime examples that clearly show this underlying market theme and its effects in the currency market. Our first example comes from the chart below. The visual effect takes place in the first half of the year, where there is clearly a wave of yen buying at the beginning of March 2002. While it is almost impossible to separate the influence of repatriated funds from general market flows in this particular move, the timing of the rally is hard to ignore. Here, the Japanese yen dropped from a 135.00 technical resistance price to a low of 126.00 against the US dollar, a difference of 900 basis points. All in the first half of the month, the dip coincided with a decline in the Dow Jones Industrial Average. A common destination for Japanese investors, US equities experienced a 3.8 percent pullback in the month. The results are tentative without flow data to confirm the move, but the occurrence isnt isolated to 2002.
Another example of active yen repatriation came in 2004. Beginning in the middle of February, USDJPY began a rally that temporarily topped out at 112.35 in the second week of March. From this peak, a persistent yen rally carried the pair another 900 points lower through the end of the month. Whether a coincident or not, when April 1st rolled around, the Japanese currencys appreciation promptly ended and the USDJPY advance continued shortly thereafter. Both the timing of the market turns and the size of the legs in this large swing suggest there was more at work than typical flows or even a shift in a broader fundamental consensus. Coincidentally, the move was in sync with US equity markets again. During the month of March, the benchmark index dropped a whopping 6.4 percent, declining from 10,700 to settle at 10,000 in the final week before retracing back to 10,600. Although repatriation wasnt the whole reason for the decline at the time, it is hard to dismiss the contribution Japanese sellers had on the market. Ultimately, other occurrences show up in the past couple of years, making the argument even stronger.
What Can We Expect?
We may already have begun to see the effects of repatriation as the Japanese yen declined through the first week in March. Topping out at 122.00, the yen coincidentally dropped 650 points in a matter of two weeks as the Dow Jones Industrial Average proceeded to decline in tandem. Exacerbating the fall seems to be larger institutions and hedge funds, short yen, that are attempting to exit their positions en masse. However, there are caveats to further yen strength. For one, the declining number of yen buyers in the market. According to most recent Commitment of Traders report, the net short yen players have been steadily decreasing for the past three weeks. Reaching a high of 167,505 net short, yen contracts are now a milder 114,626 short. Although still seemingly large, the figure is a 31 percent decline in a matter of two weeks. Furthermore this does not include the most recent report which is expected to show a more massive slide in short yen interest, a thinning of selling sentiment. Couple that with the likelihood of a return to US and foreign based investments, and there is a lot to keep the yen under pressure come April 1st.
