* Yen drops 1.8% vs USD this week, worst since Sept. 2017
* Analysts suspect heavy buying of foreign bonds drove move
* Question marks over yen’s safe-haven status
By Tom Westbrook
SINGAPORE, Feb 21 (Reuters) – The Japanese yen fell nearly 2% against the dollar this week, even while other safe-havens have climbed, prompting investors to suspect a big shift in Japanese asset allocation and to ponder the currency’s place in global finance.
The drop, which occurred over hours and hours of sustained selling, points to a big flow of cash out of Japan.
Analysts who remember a similar sell down in 2014 reckon it was probably from the juggernaut Japanese Government Pension Investment Fund and that it was probably buying foreign bonds ahead of the end of the Japanese financial year in March.
“With around $1.5 trillion in assets under management, even modest changes to the portfolio represent potentially significant flows,” said Scotiabank’s chief FX strategist, Shaun Osborne. “Market speculation suggests GPIF’s allocation to foreign bonds could increase.”
The fund said it does not comment on its specific investment behaviour. It is not due to disclose portfolio changes until March.
Yet the slow-grind selling pattern over the past two days mirrors the 2014 drop. Flow data also shows a net $27 billion of foreign bond purchases by Japanese investors this month – noted by Standard Chartered and Rabobank as contributing to the yen’s drop.
It has caused particular unease this time because of weakness in Japan’s economy and signs for months that the yen is decoupling from other safe-haven assets such as gold or bonds.
The long-held logic for the yen’s safety has been that since Japan’s low interest rates have made it the world’s largest creditor, loaned cash would be called back in a crisis and so support the currency.
But since the opposite seems to have occurred, and it has happened amid worries about Japan’s fragile economy and the creeping spread of the coronavirus, some market participants are questioning the rationale for its safety status.
“The move in dollar/yen in the past few days is far too significant to be explained solely by (sentiment),” said Rabobank FX strategist Jane Foley.
“The U.S. dollar could increasingly become the favoured store of value for many investors.”
Japan also no longer has a monopoly on low interest rates, decreasing the currency’s attractiveness as means of funding other investments.
Since about June, the yen has not tracked gold or the yield on U.S. bonds as closely as it once did. And on Friday, Asian investors mostly left it behind even while other safe assets, such as gold and bonds, rallied.
To be sure, though, it did earn some reprieve at the beginning of London’s trading day on Friday, bouncing a bit to recoup about a fifth of its losses with traders pointing out its inverse relationship to the S&P 500 stock index seemed to stay intact.
“It’s doing exactly what it says on the tin, it’s just playing a little bit of catch up,” said David Bloom, Global head of FX at HSBC.
“I’m not saying the leopard has changed its spots. The leopard looks like the leopard. But if the S&P were to fall, and dollar/yen were to rise, now I’m worried about the leopard’s spots.”
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