Cross-border financial flows are of interest for several reasons, including the information they provide about changes in a country’s indebtedness, foreign investor attitudes toward domestic assets, and current account balance.
In a recent report BAML has featured a key trend in the Liquid Cross Border Flows.
EUR Buying Undeterred By Negative Rates
After an event filled week (global PMIs, ECB, US payrolls), markets continue to buy EUR and sell USD , continuing a trend from last week.
The threat of negative rates is not deterring hedge funds or real money from buying EUR. As hedge funds are repurchasing EUR from oversold levels (76% remains), their buying could drive price action even further.
Another Run at ¥100
Despite two weeks of JPY strength, momentum investors are not chasing prices. When forecasting, who is not buying can be as important as who is. The corporate and public/official buying BAML does see has typically been associated with JPY weakness.
Domestically, the environment remains for a weaker JPY. Uridashi redemptions are near zero for the next 2 weeks. Inflows to investment trusts forecast $2.5bn in JPY selling. The $2.5bn is actually a lower bound. In April, subscriptions were $2bn more than expected. Margin traders used Friday’s JPY weakness to again take profits, however the trend remains for them to sell JPY – assisting with a slow grind higher in USD-JPY and EUR-JPY.
Emerging Market Currencies Came Under Selling Pressure
For the second year in a row, in May emerging market currencies and debt came under selling pressure and experienced some of their worst performance of the calendar year so far. In May 2012, concerns about the solvency of the Eurozone and weaker global growth proved to be a momentary catalyst for a sell-off. In June, markets rebounded strongly through the end of the year, after European Central Bank President Mario Draghi announced he would do “whatever it takes” to preserve the euro. This May, concerns about China, spillover effects of a weaker Japanese yen and a fear of Federal Reserve “tapering” all resulted in broad-based dollar strength.
As illustrated in the table above, the month of May in the last two years has been particularly weak for EM currencies against the U.S. dollar.