Buy yen on tail risks as US slowdown saps dollar

By BLOOMBERG

SINGAPORE • The yen will strengthen next year as a slowing US economy weighs on the dollar and a range of global threats spur safety demand, according to Bank of America Merrill Lynch (BofAML).

Intensifying geopolitical risks from Brexit and the dispute between the European Union and Italy may boost demand for Japan’s currency, strategists including David Woo in New York wrote in a 2019 outlook report.

“We have been bullish US dollar/ yen this year, but we see the yen reversing course and strengthening against the dollar next year,” the strategists said. “This is our first change in view on US dollar/yen after turning bullish on the pair in September 2016.”

BofAML recommends shorting dollar-yen through options, betting that tail risks will emerge in the year ahead to support Japan’s currency. At the same time it says any easing of the US-China trade dispute or new American fiscal stimulus may benefit the dollar.

The dollar has strengthened against all its Group of 10 peers this year as higher US Federal Reserve interest rates and a US-China trade war underpinned the currency. The yen has been the best performer versus the greenback among the group, losing just 0.3% to trade at 113.01 per dollar yesterday.

BofAML also recommends selling the dollar against other low beta currencies such as the Swiss franc and euro. The yen and franc offer “the best risk-reward for US dollar shorts” as both benefit from increasing US or European risks and are underpriced relative to China stress, the strategists said.

Here are some of BofAML’s other views and trade recommendations: Reduction in global trade tensions improves likelihood of a durable emerging-market rally, with the South African rand a preferred currency to play this theme. Sterling is more insulated from external factors and will benefit from avoidance of a hard Brexit outcome. Buy three-month volatility for the dollar-yen exchange rate. Bet on a flatter yield curve in two- to 10-year US Treasuries. Buy sixmonth dollar-franc one-touch options that profit when pair reaches 0.93.