Forex Flash: Striking a (mini) deal – Nomura

Share | (Barcelona) - Nomura Strategists Jens Nordvig and Saeed Amen note that over the new year, the market´s main focus has been the fiscal cliff.

They note that markets have reacted positively to the mini-deal, which extends tax cuts, but leaves major issues such as long-term spending cuts and the debt ceiling to be discussed later. In the past week, USD has weakened against G10 and EM. Equities have broadly rallied.

They have adjusted their forecasts for JPY as recent political developments imply that JPY weakness is likely to occur quicker than we had previously assumed and now expect USD/JPY to reach 90 before Q2 2013. They expect that the new cabinet led by Mr Abe will aggressively push for a 2% inflation target. They write, "We think the new inflation target is likely to be announced in January, rather than after BOJ leadership changes in April, which we had expected previously."

In order to reach that target, Amen and Nordvig believe that the BoJ will have to take bolder monetary easing steps than in the past. Therefore, they feel that Mr. Abe and his cabinet are likely to pursue his economic policy pledge, including establishing a foreign bond buying fund.

They would expect details of this fund to be announced after the BoJ leadership change, and would expect it to encourage Japan investors to invest more in foreign assets. As the economy regains momentum, thanks to bolder policy actions, they believe that Japanese investors will take more FX risks in 2013, sending USD/JPY higher. Furthermore, there is also structural weakness within trade and FDI flows, which is also JPY negative.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Forex and Currencies

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