The dollar/yen trend is “firmly down,” despite expectations for further U.S. interest rate rises, Nomura said.
It tipped the pair could target 100 or even 95 in the next three to six months, with it possibly falling to its fair value of 90 in the medium term.
“This may sound extreme, but we mustn’t forget that dollar/yen rose by over 65 percent between 2011 and 2015 and a move to 100 would only take us back to where the currency was in mid-2016,” Nomura said in a note on Thursday.
While expecting the dollar/yen to fall when the U.S. Federal Reserve is currently tightening policy may seem “puzzling,” the pair’s 2011-15 drop is even more so, Nomura noted.
“But another lesson from that period is that foreign-exchange markets are very sensitive to exits from quantitative easing policies – indeed, the dollar performed more strongly during taper and the early rate hikes than the later hikes,” it noted. “This suggests that foreign exchange markets are looking beyond near-term monetary policy and instead are trying to price policy over the medium term.”
Nomura said foreign-exchange markets were likely less sensitive to the actual timing of the Bank of Japan’s (BOJ) exit from yield curve control, or its 10-year Japanese government bond (JGB) yield target, than they were sensitive to its possibility. That suggested the dollar/yen pair may be too strong, it said.
“Another way of looking at this is that the BOJ is pursuing an interest-rate peg at the lowest rate in its history. Shorting the yen in the face of this may be extremely imprudent,” it said.
Nomura also noted that yen carry trades, or trades that borrow in the low-interest yen to buy higher-yielding assets offshore, don’t appear to be in favor and that may be in part due to the risk the BOJ may shift policy. That could cause the yen to strengthen, which would shave or erase gains from carry trades.
Another factor was weighing against carry trades: an unstable macro and risk backdrop, Nomura said.
“2017 saw booming stock markets, synchronised global growth and benign inflation. This year is seeing all these reverse. And of course,
President Trump’s policy focus has switched from tax cuts to protectionism,” it said.
The yen typically becomes a safe-haven play when markets turn risk off.