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Implications of Japanese life insurance flow – ANZ

FXStreet (Barcelona) - The ANZ Research Team sees some risk that outflows will occur and a repeat of market conditions takes place, given the historical precedent for the Australian market.

Key Quotes

“The AUD/JPY has recently touched multi-year highs. Historically these levels have caused selling in the AUD/JPY and in Australian fixed income markets.”

“Older AUD-denominated term life insurance policies are sitting well in the money and could be sold. We examine the implications for markets given the potential flow in these structures.”

“At best, we would expect to see a slowing in the purchases of new policies given FX and yield levels, which would be less supportive for these markets.”

“For the currency, history suggests that we are at vulnerable levels; however picking the exact timing of the move is difficult. In 2013, the currency persisted above 100 for a few months, despite there being some evidence of the outflow manifesting in the Japanese flow statistics. There is some risk that this time is no different. We do not think that the recent extension of QE in Japan will provide a timely offset to the flow, just as it failed to in 2013.”

“Given all of this we think that an option strategy provides the best way to position for the flow. Using a 102 knock-in put spread (strikes at 98 and 93) provides an attractive cost/payout ratio. With spot currently at 100.70, off mids a 37pips outlay can capture a move from breakeven of 97.63 to 93, a potential gain of 463pips.”

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