Wed, 16 Mar 2011 02:47:00 +0100

Forex: Short Yen, “trade of the decade” - BNP Paribas

FXstreet.com (Barcelona) - The Yen has been gaining ground strengthening against the Dollar despite the earthquake in Japan on expectations of big repatriation flows. USD/JPY is again threatening all-time lows after bottoming at 80.50 last Tuesday, and also making real big gains versus riskier currencies such as the Aussie, Euro or Pound. However, BNP Paribas sees what it calls the trade of the decade and says it's time to short the Yen.

FX Analyst Mary Nicola from the France-based bank group explained to Reuters Insider why this bearish stance on the Yen makes sense. When asked to explain the reasons why they envisage the Yen bottoming out near the current level of around JPY80 and eventually rising to JPY105 by the end of next year Mary said: “I think there's a big difference between what we saw during the Kobe earthquake in 1995 versus what we're seeing today. The big reason and behind it is largely the fiscal position in Japan, which is currently much worse than it was back in 1995 so we think what Japan is going to do given the fact that their fiscal strings are tied, they're going to focus on monetary policy and the BOJ is going to expand its balance sheet”.

Mary added: “The main concern right now is that there is going to be some repatriation flows. In comparison to what we've seen back in- during the Kobe earthquake, the insurance claims were about USD5 billion. Now, they're estimated to be between USD10 billion to USD35 billion. So we could see repatriation flows but not to the impact that we're expecting on Dollar-Yen”.

Despite the above statement may put upward pressure for the Yen, Mary explained: “I think the main thing that we need to focus on is what is happening on the BOJ, they continue to expand its balance sheets. Monetary policy is going to be the main and the most effective tool given the fact that the current debt to GDP levels for the government is at 200%, thereby putting pressure on the Yen”.

Mary also told Reuters what she sees is the best play: “I think in terms of the Yen on that end, the main play we're focusing on is long Euro-Yen positions”. She added: “Euro-Yen positions are probably what we're favoring most especially with rate hike expectations. So on the back of that, we like Euro-Yen all the way up to JPY119”.

Back to the Kobe earthquake in 1995, the Yen rose 20% over the next three months, when asked what fundametal reasons she sees behind her stance she reiterated: “Debt to GDP ratio this time around- in 1995, was about 50%; government debt to GDP ratio, this time, it's 200%. And of course, the focus on the debt situation across the G7, across the G10, has been a main concern. So, the likely escalation of any sort of or expansion in the debt levels is likely to put further strain on Japan if ratings agency decides to downgrade Japan”.

The second key Mary mentioned was that “a lot of the private invest who have investment in foreign holdings especially local Japanese, what they have, most of them are currency hedge. So if they are hedging their positions, most of their positions are currency hedge then we wouldn't see the same sort of impact that we saw back in 1995. And on the back of that, we don't see local private investors really selling off and repatriating their funds given that global bond deals are still quite high”.