One week after JPM made the exact same forecast, warning that the recent surge in the USDJPY will fade dramatically as Dollar euphoria shifts to concerns about protectionism, overnight UBS Group’s $2 trillion wealth-management arm said yen traders have got the Donald Trump "trade" all wrong, and the yen will strengthen to 98 per dollar by this time next year.
Cited by Bloomberg, the firm’s Tokyo-based head of Japanese equity research Toru Ibayashi echoed warnings first voiced on this website two weeks ago, and says expectations for fiscal expansion have become overblown, and protectionist policies will come first in the new U.S. administration.
The conventional wisdom that has taken hold in the days since Trump's victory is that since the President-elect campaigned on pledges of “massive” tax cuts and spending of as much as $1 trillion over a decade to rebuild infrastructure, he will send inflation surging while unleashing a new debt-funded fiscal stimulus. This speculation has driven the yen to an eight-month low near 114 on Friday, capping the biggest three-week decline since 1995.
However, Trump also promised to tear up existing trade deals and punish companies that send jobs overseas. It is that part that has the UBS strategist worried.
“The market has latched on to only the juicy bits of Trump’s policies, and wrapped them up with unreasonable euphoria, which we think is pretty much a misinterpretation,” Ibayashi said in a phone interview Monday. “A market that’s been overbought on hope will quickly fall apart.”
UBS and JPM are not the only ones to warn against the market's uphoria. The firms join bulls including former Japanese currency chief Eisuke "Mr Yen" Sakakibara in forecasting the yen will gradually strengthen to beyond 100 per dollar next year because of Trump’s “America first” stance on trade, even as strategists raised dollar-yen estimates at the fastest pace since January of last year. A reversal of the yen’s post-election slump would negate what has been a welcome tailwind for Japan’s struggling economy.
Among the risks facing the market is that Trump may backtrack on most of his pledges. It’s unclear how much of Trump’s campaign trail promises will translate into policy. He has already backed away from a pledge to build a wall along the southern border paid for by Mexico, saying some parts could be a fence. But he reiterated last week that the Trans Pacific Partnership, also signed by Japan and 10 other nations, would be “a potential disaster for our country.”
There are also concerns about pushback from Congress: as reported last week, Republicans have already balked at Trump's proposal to boost the national debt by as much as $5 trillion over the proposed trendline, and contrary to the House Republicans' own deleveraging budget.
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For now Sakikibara's forecast has yet to take hold: he predicted that the yen would strengthen as far as 90 per dollar within six months of Trump’s surprise election victory. Elsewhere, JPMorgan’s Tokyo-based head of Japan markets research Tohru Sasaki sees it at 99 as of the end of 2017.
That said, there is still time: both forecasters were correct in calls made at the start of the year for the yen to appreciate, when most analysts predicted an extension of the currency’s record four years of weakness against the dollar. The yen remains the best performer among its developed-market peers in 2016, strengthening 7.4% against the greenback. That trend is something Trump and other U.S. policy makers won’t be keen to change, according to UBS’s Ibayashi.
“A strong dollar will be a drag on revenue for U.S. businesses,” he said. “It’s a headwind for employment, and Americans would find that unacceptable.”
Finally, and perhaps suggesting that Trump won't even be necessary to unleash a regional wave of protectionism following the collapse of TPP, Nikkei reported that Japan has proposed stricter tariff rules that would knock five trading partners including China and Mexico off the list of countries receiving preferential treatment for emerging economies.
A finance ministry customs committee said Thursday that the list of nations qualifying for zero or minimal import tariffs on certain goods would be revised to exclude nations that account for 1% or more of world exports or make the World Bank's list of upper-middle income economies for three years running. Currently, trading partners need to qualify as high-income economies for three years to have preferential status revoked. The rules change would end special treatment for China, Mexico, Brazil, Thailand and Malaysia.
It is only a matter of time before Japan's trading partners retaliate and - if UBS and JPM are right - undo all the recent Yen losses.