Underweighting Japanese stocks on expectations of a stronger yen has taken hold as the consensus stock market trade, and there’s a big risk if that trade unwinds, Deutsche Bank said.
It noted that even the bank’s forex team sees a strong risk the yen will rise to 100-105 against the dollar in the near term, despite pressure from U.S. interest rates on the currency, as Japan’s basic balances — current account and long-term capital balances — have improved, and as the Bank of Japan is engaged in stealth tapering.
But that consensus expectation brings risks, the bank said in a note on Monday.
“We will be paying close attention to risk of sudden market shift in the case of unwinding of consensus trade,” it said.
One potential cause of a reversal: Expectations are retreated for the Bank of Japan to change its policy, particularly as the yen’s appreciation has weighed on the consumer price index, it said. Another potential cause could come from a reversal of any risk-off trades or as a rise in U.S. interest rates may strengthen the U.S. dollar, it said.
“If the strong-yen consensus trade unwinds, there is risk of sharp rise in Japanese stocks (and particularly financial stocks), which have been underweighted by investors,” Deutsche Bank said. “If fundamentals are not deteriorating and valuations are not undervalued, tactical overweight could be one option.”
The Nikkei ended Monday up 0.51 percent at 21678.26. The dollar was fetching 106.935 yen at 9:05 P.M. SGT on Monday, off lows around 104.5 yen in late March.