Yen Strengthens Further

The market has re-priced in a rate cut for the third quarter. Assuming for the sake of the argument that the Fed does cut rates at the Aug. 7 meeting, fair value for the Aug Fed funds futures contract is 94.945 (5.055%). It closed yesterday at 94.935 (5.065%). Although not in agreement with this view, the near-term news stream, including today's economic reports, are unlikely to force the market to rethink the assessment. In fact, looking beyond today and into next week, the ECB will raise rates and the early consensus is for the U.S. to report about a 100,000 rise in February non-farm payrolls on March 9, which is below the three, six and 12 months average job growth of 167,000-179,000).

Japan's Ministry of Finance weekly flow data illustrates another force at work besides speculators unwinding short yen exposure. Japanese investors continue to repatriate funds ahead of the fiscal year end. The roughly $2.75 billion sold last week brings the repatriation flow of recent weeks to $12.5 billion (roughly the equivalent of 110,000 futures contracts at the IMM). Foreign investors, as opposed to speculators, continue to buy yen. In the latest reporting period, they bought about $11.5 billion worth of Japanese securities. Also, the spread between US and Japanese 10-year yields has narrowed to 288 basis points, the narrowest of the year. At the same time, the Japanese yield curve continues to flatten and the 2-year to 10-year curve now is the flattest in three and a half years at about 80-81 basis points.