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Forex Flash: Watch for second wave of USD/JPY buying ahead - UBS

Gareth Barry and Geoffrey Yu of UBS feel that a second wave of USD/JPY buying is due.

They feel that Japanese real money is still waiting on the wings and the life insurance industry in particular has Yen to sell. They write, “Lifers maintain FX hedges worth about US$340 bn but one-by-one the incentives to trim these are falling into place. Admittedly, hedging costs are still very low. But yield spreads are rising, lifer risk tolerance has improved, and the yen has embarked on what we believe is a long-term downtrend.”

In terms of scope, they feel that a return to pre-crisis hedge ratios over time could eventually trigger
about US$155 bn worth of yen selling and the arrival of the new fiscal year on April 1st provides a good opportunity for lifers to review hedging practices. They finish by writing, “A fresh wave of USD/JPY buying could follow soon afterwards − encouraged further by another round of easing from the Bank of Japan likely on April 4th.”

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