Flash: Bullish equity flows can be bearish JPY - Nomura

FXstreet.com (Barcelona) - Nomura strategists have examined the impact of equity flows on JPY.

They note that the recent equity market developments have the potential to weaken the yen and on the surface, the fresh inflows into Japanese equities look JPY positive. However, they feel that there are two dynamics at play which make the net effect of a Nikkei rally yen negative. First, they note that currency hedging by foreign investors generates yen selling both as a function of hedge rebalancing and due to adjustment of hedge ratios. Second, they see that the increasing popularity of foreign currency denominated Japanese equity investment among retail investors in Japan also generates yen selling. Together, the team feel that these two factors have the potential to dominate the effect of unhedged foreign inflows into Japanese stocks. They write, “This is almost certainly the case in the current environment where the Nikkei is significantly outperforming other global stock markets.”