Japan investors buy foreign bonds in record amount

JPY: Big upturn in portfolio outflows from Japan

The highly anticipated earnings results from Nvidia failed to impress and its stock fell 8% in after-hours trading which has left market sentiment mixed. Asian equity markets are mostly lower although declines are relatively modest. The results could hardly be called “bad” and the drop in the share price is more a reflection of what investors have come to expect. The S&P 500 had already closed down, but by just 0.6% and really for the markets now it is a case of waiting for key events on the immediate horizon that will dictate whether the FOMC on 18^th September will cut by 25bps or 50bps.

The US dollar is modestly softer this morning and that modest risk-off momentum in global equities has not had an impact in FX with the US dollar move limited – indeed it’s the higher-beta G10 currencies doing best today, in particular the New Zealand dollar after New Zealand business confidence hit a 10-year high. Some of the responses to the survey were received after the RBNZ cut rates for the first time but pre-rate cut responses were also better highlighting improving economic conditions and easing fears over continued recessionary type conditions for businesses. We had assumed NZD would underperform going forward given the risk that the RBNZ may have tightened monetary policy excessively. This data could imply NZD performance going forward will be better than we had assumed.

One factor that is helping keep the US dollar under downward pressure is front-end yields. The 2-year UST note yield dropped modestly further yesterday in light of the equity market declines and hit the lowest level since April last year. Following Fed Chair Powell’s key speech in Jackson Hole on Friday Fed President Bostic spoke yesterday and while hinting that he could be prepared to vote for a cut in September also stated that he would like to see further data as he wants to avoid the risk of cutting too soon and then having to raise rates again and if he needs to he will err on the side of waiting. The comment underlines the importance of next week’s jobs report.

What the depreciation of the US dollar has clearly done is to lift the appetite in Japan for buying foreign bonds and equities. Japanese investors bought 899bn worth of foreign equities last week and on a 4-week basis have purchased JPY 2,217bn worth, the largest total since January 2023. The buying of foreign bonds was even more impressive with purchases totalling JPY 1,543bn and on a 4-week basis buying totalled JPY 5,613bn – which is in fact a record 4-week total in the history of the weekly cross-border flow data from the MoF going back to 2001. Clearly, the mix of a substantial drop in USD/JPY and then the revival of risk appetite coupled with still a favourable global inflation backdrop have combined to prompt a surge on foreign securities purchases. Given the limited recovery in USD/JPY on these record outflows we can assume Japanese banks with available dollars may have been the dominant buyer and/or that other market participants have remained heavy sellers of USD/JPY.

JAPAN INVESTORS HAVE TURNED BIG BUYERS OF FOREIGN BONDS BUYING A RECORD TOTAL ON A 4-WEEK BASIS

Source: Macrobond & Bloomberg

CHF: What will SNB President Jordan say about CHF strength?

The price action in Swiss franc is certainly interesting and the recent performance is somewhat surprising. EUR/CHF plunged during the intense risk-off period and dropped from 0.9750 to 0.9300 but then recovered sharply (to 0.9300) but since then (mid-August) has turned markedly lower again. Broader risk appetite remains generally favourable and so risk aversion can’t explain this latest bout of strength. Yield differentials also can’t explain the move. The 2-year yield spread which has remained broadly stable as EUR/CHF declines again.

Could this move be anticipation of the SNB possibly falling behind the curve and thus lifting expectations that real yields in Switzerland will remain more attractive in the future? Inflation is again a lot lower in Switzerland than elsewhere but the OIS curve only has a little over two more cuts by the SNB priced by the middle of next year. But a look at the 10-year government bond yield shows a plunge in yields – the 10-year government bond yield is trading just 0.40% - inflation expectations look to be falling notably given the growth outlook has not deteriorated notably of late.  The divergence is widening versus Germany underlining expected divergence (Chart above).

SNB President Jordan speaks today in Basle and it will be interesting to hear whether he addresses the recent CHF appreciation which looks quite specific and out of sync with normal trading moves. SNB Jordan may need to be more explicit about the SNB’s willingness to return to the lower bound of zero percent. Investors may be anticipating the SNB being reluctant to do that which would limit the scope for policy yields in real terms to turn negative. The annual core CPI rate stands at only 1.1% and the 10-year bond yield points to expectations of further falls. Investors are rightly anticipating policy rates globally falling by more than in Switzerland and this could be providing the franc with support. Jordan today will need to be vocal in either underlining the scope for more aggressive cuts or in intervening more aggressively to halt CHF appreciation.

EUR/CHF IS FALLING NOTABLY AGAIN – SWISS 10YR YIELD FALLING SHARPLY RELATIVE TO GERMANY

Source: Macrobond & Bloomberg

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
EC	08:15	ECB's Schnabel Speaks	--	--	--	!!!
EC	10:00	Business and Consumer Survey	Aug	95.9	95.8	!
EC	10:00	Consumer Confidence	Aug	-13.4	-13.0	!
EC	10:00	Services Sentiment	Aug	5.2	4.8	!
EC	10:00	Industrial Sentiment	Aug	-10.6	-10.5	!
EC	10:15	ECB's Lane Speaks	--	--	--	!!!
GE	13:00	German HICP (MoM)	Aug	0.0%	0.5%	!!!
GE	13:00	German HICP (YoY)	Aug	2.3%	2.6%	!!!
US	13:30	Initial Jobless Claims	--	232K	232K	!!
US	13:30	Continuing Jobless Claims	--	1,870K	1,863K	!!
US	13:30	GDP (QoQ)	Q2	2.8%	1.4%	!!!
US	13:30	Core PCE Prices	Q2	2.90%	3.70%	!!
US	13:30	GDP Price Index (QoQ)	Q2	2.3%	3.1%	!!
US	13:30	Goods Trade Balance	Jul	-97.70B	-96.56B	!!
US	13:30	Real Consumer Spending	Q2	2.3%	1.5%	!
US	13:30	Wholesale Inventories (MoM)	--	0.3%	0.2%	!
CA	13:30	Current Account	Q2	-6.0B	-5.4B	!!
US	15:00	Pending Home Sales (MoM)	Jul	0.2%	4.8%	!!
SZ	17:00	SNB Chairman Thomas Jordan speaks	--	--	--	!!!
GE	18:00	German Buba President Nagel Speaks	--	--	--	!!
US	20:30	FOMC Member Bostic Speaks	--	--	--	!!

 

Source: Bloomberg