USD under pressure – Nomura

The dollar has remained under pressure this week, despite upward surprises in US inflation as core inflation came in at 0.3% m-o-m, above consensus expectations of 0.2%, explains the analysis team at Nomura.

Key Quotes

“While there were some technical factors contributing to the increase, the strength was broad-based. The initial pick-up in risk aversion was quickly reversed, as were gains in the dollar. It seems this week the market is jumping back on the popular January trades.”

“What has also taken the market this week has been the strength in the yen. We think there are parallels with 2006 when there was short-term “global risk reduction” in Q2 of that year. We may be experiencing a similar situation currently. There are notable similarities and interesting differences, but the 2006 period showed that fundamental strength in the economy likely calms financial volatility, while for JPY to change trend more reductions in positions and/or changes in the US’s FX policy stance may be necessary.”

“A notable difference is that currently the expected expansionary fiscal policy by overseas authorities will widen monetary policy divergence further. We think this will be a medium-term positive for yen-crosses. At the same time, we think fiscal stimulus at this point of the cycle will increase uncertainty, leading to a bumpier path in yen-crosses, even with support from monetary policy divergence. We also note that USD stabilised after US long-term yields stabilised in Q2 2006.”