The Kapali Carsi

Lady Watanabe’s New Lover

An article in today’s beyondbrics blog argues that Mrs. Watanabe, who used to epitomize Japanese retail investors (who are usually housewives), has ended her longtime love affair with the Brazilian real. Her new lover is none other than the Turkish lira.

This phenomenon has actually been going on for some time. I have a Nomura note from February, appropriately titled “Net inflow into TRY via Uridashi bonds will likely persist“. However, it seems it has gained pace of late, especially as the appetite for the real has died down, thanks to capital controls, rate cuts and the like (see the FT post for the other possible reasons):  A more recent Nomura note (from mid-May) argues that “Japanese retail investors’ preferences are now shifting from BRL into TRY within both the uridashi and toshin markets”. BTW, If you think, like I did until recently, that these are character names from Shogun, it will be enough if you know that these are Mrs. Watanabe’s tools of trade: This is how she carries out her carry trade.

I am not a trader or strategist, a mere economist, and I wasn’t able to reach my friend from Nomura, who would know the bread and butter of these data, but I first wondered how much of an impact this is having in Turkey’s capital account. I would think the Japanese banks offering these instruments would demand cross currency swaps, so that’s how it should enter the Turkish Balance of Payments.

I guess Citi Turkey economists agree with me, as they have related the growing gap between the Turkish yield curve (the difference between 5 and 2-year government bonds) and cross-currency swaps to the increase in uridashi issuance. Here’s a neat graph from the note where they make this argument:

So you would expect this gap to close down (probably through an increase in cross currency swaps) once Mrs., or rather Lady, Watanabe dumps the lira as well. Citi expects that, but because of fundamental reasons more than anything else. Nomura, on the other hand, notes in their mid-May note that they “expect Japanese retail investment in foreign securities to recover gradually and thus, TRY should be one of the biggest beneficiaries in the medium term”…

P.S. Apologies for the cheesy title, but as you probably know by now, I just love my movie/literature references:)- I am not linking to the movie, as it was just awful- an utter and sheer disrespect to D.H. Lawrence’s great novel…

3 Responses to “Lady Watanabe’s New Lover”

AkbarJuly 5th, 2012 at 6:25 am

Thanks for the article. I have been following Yen-TRL relation for a while, by all means TRL had biggest gain this year but mostly becuase it lost ground last year. If you bough TRL in January then you are winner but you bought it last summer you are still down.
Frustrating thing about Yen-TRL ralationship is that it reflects what is going on with Yen-USD and USD-TRL rather than actual economic progress in Turkey or in Japan. I have been having hard time to find clear answers to the question: Why when USD loses ground against Yen it gains against TRL? Ex: in 2008 GFC USD lost ~20% against YEN and TRL lost ~30% agains USD so TRL end up lossing ~45% against Yen.
Do you think this could happen at the end of year when US gets closer to 'fiscal cliff' ?
Thank you,

Emre Deliveli edeliveliJuly 5th, 2012 at 2:14 pm

As I mention in the column, I am not a trader, but I am not surprised that USDTRY and USDJPY move in opposite directions: One is high-beta, risk on-off currency, the other is safe and boring:) But I think what happened in 2008 is very rare because US was going through a major meltdown. I don't see short-term fiscal risks, but then again, I am not the best person to judge this.

But I can tell you that the flows to the lira from Japan will continue. I am expanding this post and will turn it to a full-pledged column- will mention it there…

AkbarJuly 6th, 2012 at 2:36 am

Thank you for your responce. I guess, best way is to stay in boring but safe currency and wait few months and see how US elections and drama afterwards unfolds before getting into lira.