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Mar 05 - 12:55 AM

RBC: Assessing the Long-Term Viability of Long JPY Positions

By eFXdata  —  Mar 04 - 04:30 PM


RBC Capital Markets evaluates the prospects of maintaining long positions in the Japanese Yen (JPY) over a medium-term horizon of 6 to 12 months. The analysis suggests that while short-term factors might temporarily influence JPY valuations, such as the reestablishment of USD/JPY shorts or declines in international yields, the longer-term trajectory of the JPY will likely be determined by domestic versus foreign investor flows.

Key Points:

  • Short-term Volatility: RBC acknowledges that there may be temporary opportunities for JPY appreciation in the short term, driven by market dynamics such as the repositioning of USD/JPY shorts or adjustments in international yield levels.

  • Long-term Dynamics: The critical factor influencing the JPY's medium to long-term outlook is the balance of domestic and foreign investor flows. RBC suggests that domestic flows, particularly from Japanese life insurance companies (Lifers), will have a more significant impact on the JPY's direction.

  • Hedge Ratios: The analysis notes that hedge ratios among Japanese investors are approaching historically low levels, indicating a potential shift in investment strategies that could affect the JPY's value. However, data from October suggests that these levels have not yet reached their nadir, implying that further adjustments may be forthcoming.


RBC Capital Markets concludes that while short-term movements in the JPY may present opportunities for investors, the medium to long-term outlook for maintaining long JPY positions appears less favorable. The anticipated dominance of domestic investor flows, particularly from Lifers, is expected to be a decisive factor in shaping the JPY's valuation trajectory. Investors are advised to consider these dynamics when formulating their investment strategies, keeping in mind the potential for further adjustments in hedge ratios and domestic investment flows.

RBC Research/Market Commentary


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