FXStreet (Bali) - Be prepared for potential declines in JPY crosses during the month of August, notes Khoon Goh, FX Strategist at ANZ.

Key Quotes

"Amongst the G10, USD/JPY has fallen in 10 out of the past 14 years for an average decline of 1.3%. However, the extent of JPY strength during August is more pronounced on the crosses..."

"JPY has outperformed all other G10 and AXJ currencies on average in the past 14 years, with gains of between 1.3% (against CNY) and 3.0% (against INR)."

"The directional frequency has also been strong with the lowest at 64.3% (ie 9 increases in the last 14 years – against CNY, IDR, and NZD), and the highest at 92.9% (ie 13 increases out of 14 – against PHP)."

"The reason for JPY strength in August is due to a rise in Japanese investment income repatriation flows from their offshore debt holdings, principally those issued by the US government"

"In August this year, interest payments from US government debt will total USD42.7bn, of which roughly 19% is estimated to flow to Japanese investors (around USD8bn). August also happens to be the quietest periods in the FX market due to the northern hemisphere summer, which amplifies the flow effect."

"Based on past performances, the best way to take advantage of the August seasonal effect is to go long JPY against a basket comprising PHP, INR, KRW, and AUD."

"Alternatively, the more straightforward approach would be to sell AUD/JPY or buy JPY/KRW. The seasonal effect this year could also be given a boost by any escalation of geopolitical tensions in the Ukraine or Gaza."

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