Long NZD vs JPY: Scope to rise back above 81.00 - Nomura

The analysis team at Nomura points out that we have passed plenty of risk events in April without tail risks materialising and expects JPY underperformance which started since late April to be maintained especially against NZD over the next few months for the following three reasons. 

Key Quotes

“First, global economic momentum remains resilient, pointing to downside pressures on JPY against high yielders. Healthy global economic fundamentals have been overshadowed by political risk events recently, but over the next few months, the fundamental story should regain its importance. Second, the BOJ’s consistent easing stance should make JPY a preferred funding currency in an environment of subdued market volatility. While ECB communications should turn less dovish at the June policy meeting, the BOJ is unlikely to provide any hawkish signals over the next few months, as inflation remains well below its 2% target. Third, as tail risks have been avoided, pent-up demand for foreign assets by Japanese investors should increase. Japanese foreign bond investment was weak so far in April, as Japanese investors remained cautious ahead of the French elections. However, major Japanese lifers’ investment plans illustrate strong demand for foreign bonds without FX hedging, which should see outflows materialise soon, in our view.” 

“We think, JPY short positions against EUR are quite attractive, but we also expect NZD/JPY to perform well. On the presumption market risk sentiment does not deteriorate, NZD/JPY should be supported on dips and has scope to rise back above 81.00, in our view.” 

“From the NZD side of the equation, fundamentals are improving. The NZD remains our preferred trade in the commodity-bloc. With respect to commodities, the dairy market has rebalanced following its early 2017 shakeout and prices have rebounded. Recent poor weather points to milk production ending the 2016/17 on a softer footing, and this should keep prices supported over coming months. This is a positive for the NZD from a terms-of-trade perspective. Domestically, New Zealand data are also picking up, with Q1 CPI inflation positively surprising, labour market momentum firm and GDP growth set to rebound as transitory headwinds from early in the year recede. All up, we believe this should see the Reserve Bank of New Zealand (RBNZ) become more upbeat, relative to its current assessment, over coming meetings and this should reinforce pricing for higher New Zealand interest rates in 2018.”