Title: Nomura Strategy Report Highlights Weakening US Dollar and Strengthening Yen: USD/JPY Target Set to 142
Author Credit: Based on insights from Tim Clayton at ExchangeRates.org.uk
In a recent foreign exchange strategy note, investment bank Nomura has issued a bearish forecast on the US dollar against the Japanese yen, citing various macroeconomic and market-driven factors. The firm advises selling USD/JPY, setting a medium-term target of 142 for the currency pair. This analysis focuses on the increasing vulnerability of the US dollar and the potential resilience of the Japanese yen in the coming months, particularly heading into 2025.
Overview of Nomura’s Outlook
Nomura’s insights rest on a blend of macroeconomic forecasts, positioning data, and monetary policy expectations for the US and Japan. The overall stance suggests that the Japanese yen could appreciate due to a combination of:
– Diminishing yield differentials between US Treasuries and Japanese government bonds
– A potential shift in policy from the Bank of Japan (BoJ)
– An overextended short-yen market position
– Seasonal and structural dollar weakness
Key Points from Nomura’s Recommendation:
– Action: Sell USD/JPY
– Entry Level: Around 155.45
– Target Price: 142.00
– Stop-loss Level: 160.70
This strategy reflects a cautious but confident stance that the dollar’s recent strength may not be sustainable, especially against the yen, which may begin to show resilience as Japan exits years of ultra-loose monetary policy.
Fundamental Drivers Supporting a Weaker USD/JPY
Nomura’s case for a weakening USD/JPY exchange rate rests on several fundamental and technical factors. These include the following:
1. Shifting US Monetary Policy Sentiment
One of the most crucial drivers of USD/JPY is relative interest rate differentials. For the past two years, a dovish Bank of Japan and aggressive tightening from the US Federal Reserve led to a surge in USD/JPY. This dynamic may be nearing a turning point for several reasons:
– US data points to a slowing economy, increasing the probability of Fed rate cuts in late 2024 or early 2025.
– Inflation in the US has shown signs of stabilizing, reducing pressure for further interest rate hikes.
– Fed officials have begun to signal concerns over tight financial conditions and their dampening effect on growth.
Nomura observes that if US interest rate expectations soften further, demand for the dollar could weaken, especially against lower-yielding currencies like the yen, whose fundamentals are improving.
2. Bank of Japan Policy Normalization
Until recently, the BoJ’s ultra-accommodative monetary stance had restrained the yen. However, there are growing indications that Japan may begin a policy shift away from negative interest rates and yield curve control. According to Nomura:
– Japanese inflation has stabilized above the BoJ’s 2% target, giving policymakers room to exit from extreme monetary easing.
– A gradual move toward policy normalization could lead to higher Japanese government bond yields, narrowing the US-Japan yield spread.
– Markets are beginning to price in at least one rate hike by the BoJ in late 2024 or early 2025.
This shift would likely increase investor demand for the yen and reduce the attractiveness of yen-funded carry trades, where investors borrow yen to invest in higher-yielding assets. Unwinding of these trades would further support JPY appreciation.
3. Overcrowded Yen Short Position
Nomura’s analysis suggests that market positioning may be excessively skewed against the yen, creating a potential for a short squeeze. Key observations include:
– Leveraged funds and speculators have maintained significant short-yen positions through futures and options markets.
– The yen has been one of the most heavily shorted G10 currencies due to Japan’s persistent yield disadvantage.
– Any catalyst, such as a BoJ rate hike or stronger Japanese economic data, could trigger a rapid reversal of positioning,
Explore this further here: USD/JPY trading.