USD/JPY, EUR/JPY Flows - Coupons and Repatriation.

Published at 12:09 (GMT) 11 Nov

Coupons and repatriation.

• One of the big four months, and more dollars into a dollar offered market.

• Perhaps only hints at intervention can help.

Four times a year, the US treasury market bunches up redemption and coupon payments, in February, May, August, and November. The impact in the forex markets tends to be fairly significant, and involves specifically the coupon payments rather than the redemptions. This month those payments will be redemptions of USD43.53n, and coupons to the tune of USD20.76bn, and these payments will be made by the US treasury next Monday - on November 16. The normal end of month payments (because of weekend dates) will arrive on Monday November 30 and for the record will be redemptions of USD24.54bn and coupons of USD4.17bn.

Though by no means a specific rule, here we generalise and suggest that redemption proceeds tend to be hedged, and as such any repayments to overseas holders of these bonds should be netted out in currency terms, even if the money is not going to be reinvested in any of the upcoming issuance. On the coupon side, at least in Japan, it has been traditional that these payments have been used as 'expense money' by fund managers, and tends not to be hedged. The coupon payments emanating from the increasing amount of US Treasury holdings by individual investors, known collectively in the marketplace as 'Mrs Watanabe' is also likely, we suggest, to be treated in the same way. As such the repatriation of this money - specifically to Japan - will have an impact in the marketplace.

Though there is evidence that this is changing, perhaps strangely, not only have Japanese fund managers tended not to hedge these coupon funds, but it appears that as well they do not tend to sell the USD proceeds ahead of actual receipt. As such, though there is an element of front-running by the market, this has generally meant that downside pressure specifically from coupons arrives during the two to three days following the pay date. If there is already any downside pressure on USD/JPY at that time, then this pressure can obviously be increased.

Though some of the JPY crosses are seeing demand, the USD continues to suffer as quantitative easing flows move through the system, and as traders have increasingly started using the currency as the lending side of new carry trades. As the 'equities up/dollar down' becomes the norm as a measure of willingness to take risk, then more and more sellers of USD/JPY are seen - almost to the extent that those with longer memories have been starting to look for signs of intervention from the Japanese authorities. Longer term technical studies suggest that we are close to a base, with support seen on an 87 'handle' - at 87.98 and then at 87.11. But though a break would target the 84.50-86.00 zone, it is very likely, we think that although intervention will not actually be seen, talk about the potential for intervention might well be enough to prevent increased speculative sales through that handle. Shorter term technical studies appear to be relatively neutral/positive, a situation that might find day traders caught long and wrong when the coupon supply hits next week.