While there have been some big market moves since the US election on November 8, one have the most pronounced has been in the US dollar — Japanese yen cross rate.
The US dollar has been on a tear while the Japanese yen has been flattened, leaving the USD/JPY up a handy 11.5% from the lows struck on November 9 when traders initially took the view that a Donald Trump presidency would smash the global economy.
It’s been a punchy move in anyone’s language, particularly in such a short period of time, and one that Morgan Stanley’s FX strategy team, led by Hans Redeker, believes will only continue in the year ahead.
Such is its confidence that the move will continue, it’s declared that buying the US dollar against the Japanese yen is its top FX trade for 2017.
“JPY is our top currency to sell as the BoJ’s yield curve control strategy should allow yield differentials to widen versus the US,” the bank said in a research note released on Sunday.
“We expect USD/JPY to head to 130 in 2Q18… (while) the broad USD index is expected to gain 6%, topping out in 2Q18.”
In September this year, the Bank of Japan introduced “Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control”, a policy tweak aimed to target the shape of the Japanese yield curve.
The bank is targeting a nominal bond yield of 0% for 10-year Japanese government bonds, something that has undermined the yen’s appeal on pure interest rate differentials to the US dollar along with a variety of other highly-liquid currencies.
Should the Morgan’s call be on the money, it would leave the USD/JPY up 15% from its present level.
Outside of the USD/JPY, the bank says that the buying the US dollar against the Korean won, along with selling rallies in the EUR/GBP, are its second and third top FX trades for 2017.
Morgans’s says that the “euro should struggle as the ECB remains accommodative and political uncertainty remains”.
It also says that emerging market currencies will weaken next year “in low-yielding Asia (CNY, KRW, TWD, SGD and THB) or countries with external liabilities (TRY, ZAR and MYR)”.
It is also “bearish” on the Australian and New Zealand dollars, suggesting that “rising global funding costs do not bode well for liability currencies such as AUD and NZD”.
“Our bearish AUD and NZD outlook may initially find its main support from higher USD yields steering funds into the US,” it says. “Later in the cycle, commodity currencies may fall harder, driven by rising real US rates and a slowing China,” it says.
Here’s Morgan Stanley’s top ten FX trades for 2017, along with a small synopsis on the reasons underpinning its call.
1) Long USD/JPY
Yield differentials driving outflows from Japan and higher inflation expectations.
2) Long USD/KRW
Diverging growth and monetary policy to increase outflows from Korea.
3) Short EUR/GBP
No new negative UK news allows the undervalued GBP to recover.
4) Long USD/NOK
Norway government’s slower fiscal support to make long NOK positions adjust.
5) Short AUD/CAD
Reflects the diverging US-China economic growth stories.
6) Short SGD/INR
Relative external sector dependence, China exposure and debt overhangs.
7) Long USD/CNH
RMB weakens from capital outflows and diverging monetary policy from the US.
8) Long BRL/COP
We expect reform momentum and high yields to cushion external risks
9) Long RUB/ZAR
Continued tight monetary policy should help RUB outperform
10) Long CHF/JPY
Yield differentials weaken JPY, while CHF is a good eurozone political risk hedge.
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