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Financial services giant picks six currency trades for now through December

Key Points
  • Nomura set out six currency trades for investors to run through the end of 2017
  • Those trades aren't good news for the dollar
Matthew Lloyd | Getty Images

The year may be nearing its last lap, but Nomura isn't done with currency trades, setting six to run through the end of 2017.

Here's what the Japanese financial services firm recommended:

Get even more bearish on the U.S. dollar

Nomura was already bearish on against and now it's adding the yen.

The bank said in a section subtitled "Tweeting weakness" that it expected the greenback was entering its first year of a new, multi-year downtrend.

The main reason was a muddy U.S. political picture, it said.

"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 U.S. event in coming months," it said, noting the worst-case scenario was for no agreement to be reached before the extension expires in December.

"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, [ Deferred Action for Childhood Arrivals], North Korea and possibly the Mueller investigation," it added, with its latter item referring to the probe into possible collusion between presidential campaign and Russia.

Nomura noted that lawmakers' dockets will be compressed into only around 30 days through the end of the year.

Nomura said there was another nail in the dollar's coffin: Yields in Germany and Japan are both around zero, meaning that the downside risk was very limited, unlike in the U.S.

It said it expected the euro could reach $1.25 or higher in coming months, while the dollar/yen could fall toward 100 to 105.

The euro was fetching $1.1971 at 9:17 a.m. HK/SIN and the dollar was fetching 110.18 yen.

Sell the British pound against the Canadian dollar

Nomura said it was already short against as well as the dollar and the New Zealand dollar.

Now it's added Canada's loonie.

In part, that's because of Brexit, it said.

"Signs of a turnaround or breakthrough in Brexit talks remain few and far between," it said. "Headlines of fruitless negotiations have become a common feature of the news round."

On the flip side, Canada's domestic outlook was going "from strength to strength," with economic growth momentum not only the strongest among the G-10 nations, but also broad-based, Nomura said.

It said it expected the Bank of Canada would hike interest rates again in December and further in 2018.

The kiwi is looking "sheepish"

Nomura was sticking with its call for the New Zealand dollar, known as the kiwi, to lose ground against the Australian dollar.

"There are some encouraging signs coming through in the Australian economy, with investment intentions upgraded, business conditions elevated and momentum in the labor market positive," it said. It added that, while the Reserve Bank of Australia was in no hurry to raise rates, the next move would still likely be higher.

"Conversely, growth momentum in New Zealand's mature economic expansion remains sluggish, with underlying inflation pressures benign. This keeping the Reserve Bank of New Zealand cautious and with a bias to lean against market interest rate expectations, particularly given the heightened discomfort about the persistent New Zealand dollar strength," it said.

Nomura said there was another factor playing against the kiwi: Prices for New Zealand's key export, whole milk powder, looked set to underperform compared with Australia-centric commodities, such as iron ore.

Short the dollar against China's yuan

The dollar was seeing some corporate selling against as China officials cap the fixing level, intervene in the market and change capital outflow regulations, Nomura said.

"This may continue in the coming months and provide positive support for the overall flow backdrop," it added.

It said it expected the dollar/yuan would fall toward 6.40 in coming months.

The dollar was fetching 6.5286 yuan on the onshore market at 9:31 a.m. HK/SIN.

Watch out for the South African rand

Nomura said it was long volatilities, noting that, despite a large number of domestic risk events over the next few months, the currency wasn't priced accurately.

"The lack of rand risk premia is also at odds with a similarly large number of potential risk events on the international calendar, to which rand is particularly vulnerable given its sensitivity to shifts in broader U.S. dollar sentiment," Nomura said.

Playing off the pesos

Nomura said it was short the Mexican peso against Chile's peso.

"We expect the Chilean peso to be the best-performing currency in Latin America amid a process of economic recovery, high copper prices and the likelihood of the right-wing candidate winning the presidential elections in November (putting a halt to depressed business expectations partly triggered by the reform agenda of the current center-left government)," it said.

"On the other hand, we believe the will continue to face depreciation risks on the back of the uncertainty surrounding NAFTA negotiation and the presidential election ahead."