Tags: Nomura | Yen | fall | Dollar

Nomura Expects Yen to Fall Another 10 Against Dollar

Wednesday, 08 October 2014 07:47 PM

Nomura Holdings Inc., the most accurate forecaster of Japan's currency, sees the yen falling 10 percent to 120 per dollar on a persistent trade deficit and unattractive yields.

Two-year U.S. Treasury bonds provided an additional yield of 52 basis points over Japanese government notes on Sept. 24, the most since April 2011, data compiled by Bloomberg show. The correlation between the spread and the dollar-yen rate rose to a six-month high as the Japanese currency depreciated past 110 for the first time since August 2008 last week.

Bank of Japan Governor Haruhiko Kuroda’s record debt purchases helped push two-year yields this week to the lowest since he took the helm in March 2013, while Treasury yields are climbing as the Federal Reserve stayed on course to end its bond buying this month. Nomura, the best forecaster in Bloomberg Rankings for the four quarters ended Sept. 30, said 26 months of trade deficits are adding to pressure for yen weakness.

“Expectations that U.S. interest rates will move higher and continuation of Japan’s trade deficit are enough to push the yen to 120 per dollar even without the help of speculators,” Yunosuke Ikeda, Tokyo-based head of currency strategy at Nomura, Japan’s biggest brokerage, said at a seminar in Tokyo on Tuesday. He said short positions, which profit from yen declines, may start to wane as the currency drops beyond 110.

The yen traded at 108.10 per dollar at 5:43 p.m. in Tokyo Wednesday after touching 110.09 on Oct. 1, the weakest since Aug. 25, 2008. It has depreciated 2.6 percent this year after plunging 18 percent in 2013, the biggest drop since 1979.

120 Target

Nomura isn’t the only one forecasting Japan’s currency will extend losses to levels unseen since July 2007, before the collapse of Lehman Brothers Holdings Inc.

Kozo Yamamoto, a member of Japan’s ruling Liberal Democratic Party, told Bloomberg News this week a drop to between 110 and 120 “wouldn’t be odd,” with continued BOJ easing and the Fed’s winding down of stimulus.

Takuji Aida, the Tokyo-based chief economists at Societe Generale SA, also projects the yen will weaken to 120 as the gap between Treasury yields and JGBs widens.

“The currency market will become more sensitive to yield differentials going forward as the Fed’s policy tightening expected later next year becomes more real,” he said on Oct. 6.

Yield Gap

Two-year U.S. Treasurys yielded 0.50 percent yesterday, while equivalent Japanese sovereign debt was at 0.05 percent. Their spread will widen to 1.54 percentage point at the end of 2015 from 45 basis points, according to estimates of analysts and economists in separate Bloomberg surveys. A basis point is 0.01 percentage point.

The 60-day correlation between the yield spread and dollar- yen rate climbed to 0.61 on Oct. 1, the highest since April 7 and up from as low as 0.16 in June. A reading of 1 would indicate the two moved in lockstep.

Futures trading shows a 45 percent likelihood that the Fed will raise interest rates to 0.5 percent or higher by the end of July. Twenty two of 33 economists surveyed by Bloomberg expect Japan’s central bank to expand its program of buying 60 trillion yen ($555 billion) to 70 trillion yen in assets annually, a poll conducted Sept. 26-Oct. 2 showed.

Expectations that U.S. and Japanese monetary policy will continue to diverge have already boosted bets on the yen’s slide to the most in nine months. Wagers by hedge funds and other speculators that the currency will drop against the dollar exceeded bets that it will strengthen by 120,878 in the week ended last month, the largest net-short position since Jan. 7, according to U.S. Commodity Futures Trading Commission data.

‘Fixated’ Market

“The market has got itself fixated on the idea of an early start to the Fed’s tightening cycle and the risk now is that it has set itself up for disappointment,” said Ray Attrill, global co-head of currency strategy at National Australia Bank Ltd. in Sydney. “I don’t think the dollar is going to weaken significantly, but we may spend a good part of the fourth quarter consolidating the gains.”

NAB, the fifth best forecaster, expects the yen to trade at 108 by year-end. The median estimate of more than 40 analysts surveyed by Bloomberg is for the yen to slide to 109. National Bank Financial, Macquarie Bank and BMO Capital Markets completed the top-five ranking.

The yen slid for the third month in September as Japanese investors sought higher yields overseas. They bought a net 789.8 billion yen of U.S. Treasurys in August, a sixth month of purchases, data from the Finance Ministry and central bank showed yesterday.

Japanese government bonds have handed investors a 2.2 percent gain this year, according to Bank of America Merrill Lynch data. U.S. Treasurys returned 4.6 percent.

“The Fed’s interest rate increase will be fully priced in sooner or later and we will likely see inflows into U.S. Treasurys increase,” said Tomohiro Miyasaka, the Tokyo-based director for fixed-income strategy at Credit Suisse Group AG.

Credit Suisse expects a Fed rate rise in the second quarter of next year, pushing the yen to 118 by Sept. 30.

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Nomura Holdings Inc., the most accurate forecaster of Japan's currency, sees the yen falling 10 percent to 120 per dollar on a persistent trade deficit and unattractive yields.
Nomura, Yen, fall, Dollar
Wednesday, 08 October 2014 07:47 PM
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