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Here's Nomura's top currency trades to round out the year

Photo by Mike Heydon/Jet Productions NZ Limited via Getty Images

If you’re scratching around for some trading ideas for the months ahead, Nomura may have exactly what you’re looking for.

It’s just announced its top currency trades to round out the year, predicting that many of the themes seen this year will continue in the period ahead.

1. Sell the US dollar against the Japanese yen and euro

At the top of the list is to sell the US dollar against the Japanese yen and euro, with Nomura suggesting that US politics will continue to undermine the buck.

It explains:

The recent extension of the debt ceiling and government funding only until the end of the year will keep investors concerned about a possible negative US event in coming months. The worst of these is that no agreement is reached before the extension expires in December. The unhappiness of various segments of congressional Republicans over President Trump siding with the Democrat three-month extension plan will add to these risks.

It’s also worth bearing in mind that on top of dealing with the debt ceiling and government funding, the administration and Congress will have to contend with the fall-out from Hurricanes Harvey and Irma, tax reform, DACA (deferred action for childhood arrivals), North Korea and possibly the Mueller investigation. This full docket will have to be compressed into a much shorter period in which Congress is in session. There are only around 30 days when both the Senate and House are in session until the end of the year, compared with the 43 days in the pre-summer session and 52 days in the pre-Easter session.

With the US political situation likely to drag, potentially delaying a further tightening in monetary policy from the US Federal Reserve, Nomura says that recent gains in the yen and euro will continue as we approach 2018.

“We think euro could reach 1.25 or higher in the coming months, and USD/JPY could fall towards 100-105,” it says.

“Though some short-term sentiment measures point to investors being bearish dollars, the structural view of investors is leaning bullish, with the consensus of analysts looking for no change in the euro over the next year and an increase in USD/JPY.”

The USD/JPY currently buys 110.10, with the EUR/USD at 1.1976.

2. Sell the UK pound against the Canadian dollar

If dabbling in the dollar, yen and euro isn’t your thing, Nomura has a couple of other alternatives, including buying the Canadian dollar against the British pound.

While it admits that Brexit negotiations present a clear risk, it says that “the reality as it stands is that, transition period or not, the UK is likely to leave the single market if not within the next two years or so sometime in the not so distant future”.

And with the Canadian economy gathering steam, Normura says the Bank of Canada will follow up the two rate hikes already delivered this year with another in December.

The domestic outlook continues to go from strength to strength. Economic growth momentum, which is the strongest among the G10, is broad-based, and is tracking above potential. As a result, measures of excess capacity across the economy and labour market continue to be eroded, and point to a pick-up in inflation over the horizon. Even after the BoC’s back-to-back interest rate hikes, the upbeat tone on growth and an underlying effort to mitigate financial stability concerns mean the Bank’s tightening bias is intact.

We are looking for another BoC rate hike by December and more in 2018, with a rate rise at the October meeting possible. The market should continue to price in an outlook for higher BoC interest rates, and when combined with the ongoing rebalancing in global energy markets, CAD should remain supported.

Nomura says market perceptions about the outlook for economic activity and monetary policy between the UK and Canada should “continue to keep the UK-Canada swap spread deep in negative territory, and GBP/CAD under pressure”.

The GBP/CAD currently fetches 1.6191.

3.Buy the Australian dollar against the Kiwi

If the dealing with the risk of Brexit negotiations isn’t your thing, Nomura has a trade for those with an interest in the antipodean currencies, the Australian and New Zealand dollars.

It thinks the Aussie will outperform the Kiwi, something the Wallabies haven’t been able to master over the All Blacks.

On the Australian economy, Nomura says there are some encouraging signs emerging which, along with positive external factors, should act to support the Aussie.

Even though we think the RBA is in no hurry to raise interest rates, the next move is forecast to be up and the market will likely price in that direction, particularly as growing parallels continue to be drawn by the market with the BoC and interest rate hikes in Canada. From an external standpoint, there are also supportive AUD factors. The mix of a lower USD, accommodative global financial conditions, and synchronised global expansion, particularly the stability in Chinese growth, remains supportive for base metal prices and in turn the AUD.

On the contrary, Nomura says growth momentum in New Zealand’s mature economic expansion “remains sluggish” with “underlying inflation pressures benign”.

As such, it says this will keep the RBNZ “cautious and with a bias to lean against market interest rate expectations, particularly given the heightened discomfort about the persistent NZD strength”.

On the New Zealand general election, arriving next week, it says that a win for the ruling National Party-led coalition “could see the NZD endure a modest relief rally after the event”.

Recent polling suggest that’s the most likely outcome.

“In our opinion, the broader and relative macroeconomic trends are continuing to develop in favour of the AUD, and our AUD/NZD estimate is pointing to a higher cross-rate,” Nomura says.

The AUD/NZD currently buys 1.1013.

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