Got a yen for the Japanese currency? Be careful, this strategist says.
Quick, what's your favorite currency safe haven? If you answered with the Japanese yen, you've got plenty of company.
Jens Nordvig, head of fixed income research Americas and global head of G10 FX strategy at Nomura Securities, doesn't take issue with the yen's safe-haven status. But right now, he says, a variety of pressures are weighing on the currency, and he wants to steer clear.
What does Nordvig have in mind? For starters, there are trade flows. Nordvig expects Japan's trade balance for 2012 to come in with a deficit, around -1.1% of GDP, compared with a surplus of 1.7% of GDP in 2010. Not only that, "foreign direct investment outflows are also pointing to stronger outflows than we have seen for years, " Nordvig says. Cross-border M&A activity out of Japan this year is already one and a half times the level of all of 2011, he adds. That means a lot of Japanese acquirers will have to sell yen to buy the currency where their acquisition is based.
Also, Nordvig has been in Tokyo for meetings, and he reports that "compared with my previous visits to Japan in recent years, I detected more hope that the US could surprise to the upside in 2013, " what with hopes for the housing market and for more investment after the Presidential election.
Then there is central bank policy. While Japan could face international opposition to any move on its part to weaken its currency, "there is a broad consensus that the political pressure for a weaker yen on the MOF and the BOJ has never been greater, " Nordvig wrote in a note to clients.
Putting it all together, "what we have learned in Tokyo reinforces our view that risks are skewed towards yen weakness over the next 3-6 months, "Nordvig says. He expects the dollar to reach 80 yen in the fourth quarter, and 82 by the end of the year.