Nomura | G10 FX Insights 17 May 2012
in external capital flows (see
,16 May 2012).Such a scenario would also have implications for the relative performance of riskassets, including risk-sensitive currencies. We would expect USD and JPY to be theoutperformers in that case, while the outlook for more risk-sensitive currencies ismuch more uncertain, even for countries with superior fundamentals relative to theeurozone.
JPY: benefit from Greek exit
We maintain the view that USDJPY rises gradually toward 85 by end-2012. Thesurge toward 84.18 in Q1 was mainly led by speculative investment in our view andthus, USDJPY slipped back to 80 now. However, Japan oriented flow is also pointingout higher possibility of gradual rise of USDJPY. Most notably, we expect the tradebalance to remain in deficit for the time being, even though current account deficit isunlikely anytime soon (see
,7 February 2012). In addition, improvement in the global economic outlookshould weaken safe-haven demand for JPY and encourage Japanese investors totake more foreign exchange risks (see
, 8 March 2012). In fact, toshins were net buyers of foreign securities in April for thefirst time since last August (see
in April.Nonetheless, recent renewed concerns on the eurozone debt problems posedownside risks to the scenario. We expect USDJPY to decline to 78.5 if Greek exitsfrom eurozone. A Greek exit should re-accelerate safe haven foreign inflow intoJapanese T-bills, putting downside pressures on yen-crosses. Global financial turmoilshould also discourage Japanese investment in foreign securities. An economicslowdown associated with chaos after Greek exit may potentially lead to lower oilprices, which should improve Japanese trade balances. The
Fed‟s exit strategy
should also delay . Against these headwinds, Japanese authorities, MOF and BOJ,may be forced to take policy responses, including FX intervention. We currently see78 as the important USDJPY level for the government to protect.
Other G10 currencies: QE benefits high-beta currencies after adjustment
AUD is expected to trade at or just above parity for most of the year (1.01 by end-2012) as a structural trade surplus justifies AUD trading at historically high levels.While we expect further rates cuts form the RBA, this is largely priced in by marketsand so should have limited negative impact for AUD. NZD is more attractive in ourview. New Zealand should see further capital inflows from foreigners buyinggovernment bonds and related to earthquake reinsurance. We expect NZDappreciation, to 0.82 by year-end, and so we remain structurally bearish AUD/NZD,which we see grinding towards 1.20 in the next year. In the case of a Greek exit, wewould expect market turbulence to hurt both AUD and NZD as high-beta currencies,with AUD expected to sell off to 0.91 and NZD likely to fall to 0.73 in H2 this year.Assuming ECB steps in with QE, we would expect to see sharp drops in the euro vs.
the antipodeans (e.g. EUR/AUD at around 1.20 in a year‟s time) as QE puts pressure
on the euro and increases market risk sentiment, benefiting high-beta currencies.Strong fiscal and external positions and robust banking sectors should continue toattract investors to the Scandinavian countries. Moreover, in the case of no Greekexit a global economic recovery (albeit slow) should find these economies in a goodposition to gain from increased exports and improved sentiment and hence weforecast a grind lower in both EUR/SEK and EUR/NOK, to 8.80 and 7.40,respectively, for end-2012. We see NOK/SEK at around the current level, the
strongest in two years, as Norway‟s economy remains stronger, much thanks to a
strong robust domestic
sector. At the same time, one factor capping NOK‟s
appreciation is Norges Bank stepping up the pace of the FX purchases (NOK selling)on behalf of the sovereign pension fund due to higher oil income. In the case of aGreek exit, both Scandies as relatively illiquid currencies are bound to see significant