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Higher rate of currency hedging, likely to weigh on USD/JPY from 2016 – Deutsche Bank

FXStreet (Delhi) – Taisuke Tanaka, Strategist at Deutsche Bank, suggests that the hedging activity by lifers in their foreign securities investment has sometimes had a more powerful impact on JPY markets than the flow of foreign securities investment itself.

Key Quotes

“Moreover, once market trends have changed, new trends can accelerate dramatically by market-following hedge unwinding/accumulating. Hedging flows by lifers and others was one of the key factors that drove the JPY downward by more than 10% over three months in late 2005.”

“The USD/JPY remained soft until 2012, but the hedging ratio remained in slow decline. While the USD/JPY rebounded more than 60% from 2012, the hedging ratio only dropped from 62.7% to 52.3% (end-March 2015).”

“Lifers do not separate their hedged foreign securities and foreign-currency bonds in their disclosed data, but assuming a 50/50 rate, we find that the hedging ratio on their foreign-currency bonds is near its low point.”

“We do not see lifers’ hedging ratio will suddenly jump in near future. Still, if 2016 should see a further retreat in the bullish view of the USD/JPY next year or a brief rise in the rate beyond 125, lifers may increase their hedging, which could weigh heavily on USD/JPY markets.”

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