Nomura has taken a 180-degree turn on the yen, from expecting weakness amid rising U.S. interest rates to now forecasting the Japanese currency will strengthen.
“A scenario of a rising dollar/yen is now challenged by recent changes in the U.S.’s policy stance,” the bank said in a note dated Thursday. Its comments pointed toward the U.S. government’s pursuit of increased spending and tax cuts as well as U.S. President Trump’s threats to launch a trade war.
“Offshore investors may require higher returns owing to fiscal and inflationary risks,” it said. “The U.S. investment environment is even worse now, as President Trump announced the possibility of blanket tariffs on steel and aluminium imports.”
The rise of protectionism will also adversely affect risk sentiment, which may encourage investors to choose the yen as a currency to long against the U.S. dollar, Nomura said.
Tariff moves ‘crucial’ for dollar/yen
Near-term tariff developments will be crucial for dollar/yen trading, it said.
In an upside scenario, if the U.S.’s tariff stance turns flexible or weaker, then monetary policy divergence will again drive the dollar/yen pair, with the possibility of a recovery to 110-115 in sight, Nomura said.
In the downside scenario, if the U.S. government continues with protectionist plans and its trade partners impose countermeasures, risk sentiment will likely further deteriorate, and the dollar/yen could test 100, Nomura said, adding it saw the risk of this scenario as around 20 percent.
How low can it go?
Nomura cut its dollar/yen forecast for the first quarter to 105 from 155, and for the second quarter, it cut its forecast to 108 from 120. For both the third and fourth quarters, it cut its forecast for the pair to 110 from 120.
Nomura said it will monitor how Japanese investors respond to recent U.S. policy changes, and watch for signs of dip-buying in the new fiscal year starting April 1.
”Higher U.S. yields and lower dollar/yen spot improve the attractiveness of U.S. Treasury investment without foreign-exchange hedging for Japanese investors,” Nomura said. “At the same time, they also need higher returns owing to uncertainty about U.S. policy and the implications for the economy.”
The dollar/yen was at 106.18 at 2:09 A.M. SGT.