The safer-haven yen gained ground heading into week-end, touching its strongest levels since September.
The yen climbed, with Stephen Innes, head of Asia Pacific trading at OANDA, pinning the move on repatriation flows.
“The move higher in USD/JPY this year was accompanies by a rise in Japanese equity outflows, which have primarily gone to U.S. stocks,” he said in a note on Friday, adding Japanese insurers own a “staggering” more than US$500 billion in U.S. dollar-denominated assets.
Now, “the first instances of repatriation flow are starting to kick in,” he said. “We could see more currency hedges triggered or repatriation flows if the USD/JPY falls further, which will have far-reaching implication across G-10 and emerging market currencies.”
Separately, Nomura attributed the resurgent yen to the U.S. Federal Reserve’s slightly less hawkish statement earlier in the week.
The Fed hiked interest rates by 25 basis points to 2.25 percent to 2.50 percent, as expected, on Wednesday, and signaled it would continue to gradually raise rates as well as continuing to cut its balance sheet. But the Fed also lowered its forecast for 2019 economic growth to only 2.3 percent, down from a 2.5 percent forecast in September.
“The correlation between USD/JPY and U.S.-Japan rate spreads remains relatively high, and the Fed’s downgrade of its long-term median dots is depressing USD/JPY via lower 10-year U.S. Treasury yields,” Nomura said in a note on Thursday.
“In the short term, a sharp fall in global stock prices triggered by less-than-expected FOMC dovishness and lower long-term dots of the committee should put downward pressure on USD/JPY,” it said.
But Nomura added that as the pair approaches 110, it should spur dip-buying demand, limiting potential downside.
The U.S. dollar index was at 96.39 at 7:05 A.M. SGT, dropping from levels just shy of 97 in early trade on Thursday, according to ICE futures data.
The 10-year U.S. Treasury note yield was at 2.805 percent at 8:18 A.M. SGT, up from levels as low as 2.752 percent in Thursday’s session, according to Tullett Prebon data.
The euro/dollar was at 1.1456 at 8:20 A.M. SGT after trading in a 1.1375 to 1.1486 range on Thursday, according to DZHI data.
The British pound/dollar was at 1.2669 at 8:20 A.M. SGT after trading in a 1.2610 to 1.2707 range on Thursday, according to DZHI data.
The dollar/yen was at 111.25 at 8:21 A.M. SGT after trading in a 110.78 to 112.604 range on Thursday, tumbling from as high as 113.708 last week, according to DZHI data.
The dollar/yuan ended Thursday at 6.8850 after trading in a 6.8818 to 6.9133 range during the session, according to DZHI data.
The dollar/Singapore dollar was at 1.3697 at 8:21 A.M. SGT after trading in a 1.3663 to 1.3730 range on Thursday, according to DZHI data.
The dollar/Malaysian ringgit was at 4.1750 at 8:11 A.M. SGT after trading in a 4.1723 to 4.1865 range on Thursday, according to DZHI data.
The dollar/Indonesian rupiah ended Thursday at 14,465 after trading in a 14,376 to 14,555 range during the session, according to DZHI data.
This article was originally published on Friday, 21 December 2018 at 8:37 A.M. SGT; it has since been updated with comments from Nomura.