As Dollar Stumbles, Yen Offers Best Option for Bulls, AMP Says

(Bloomberg) -- Nader Naeimi added to his bullish wagers on the dollar against the yen this month, predicting a 10 percent gain to 125 as the Bank of Japan maintains monetary stimulus. He’s less optimistic the greenback will strengthen against other currencies.

While the Federal Reserve is set to raise interest rates twice this year, the “positive dollar impact is unlikely to be as prominent as widely believed,” said Naeimi, who heads a dynamic investment fund in Sydney at AMP Capital Investors Ltd., which oversees $120 billion. That’s because the tightening will coincide with a likely reduction in the European Central Bank’s asset-purchase program and the end of policy easing by some emerging-market nations, he said in an interview. 

Betting on the divergence between monetary policy at major central banks, the most popular trade in the $5.1 trillion-a-day global foreign-exchange market, is fading as interest-rate differentials become less pronounced, he said. Bloomberg’s dollar gauge has fallen about 2 percent this year, after climbing in each of the past four years.

“We are past the peak of global monetary policy divergence,” said Naeimi, who has two decades of investment experience and made a profit from buying the dollar against the yen before November’s U.S. election. “The easy money to be long dollars against everything is well and truly behind us.”

Hedge funds and other large speculators reduced bullish bets on the dollar for a fourth week in the period through Feb. 7, pushing them to the lowest since November, according to the latest data from the Commodity Futures Trading Commission in Washington. Wagers have dropped by almost a third from their high in January.

Trump Effect

The dollar jumped after President Donald Trump’s election victory fueled bets his reflationary policies would spur the Fed to accelerate rate increases. The currency has since wiped off about half those gains as he accused some of the nation’s major trading partners of keeping their currencies too weak. The greenback fell Thursday even as traders boosted the odds for a March rate increase following better-than-expected inflation data. 

“The fact that the investment community is still betting on an ongoing dollar appreciation further reinforces the case for a downside surprise,” Naeimi said.

Other investors are also growing less bullish about the dollar.

While the greenback is set to strengthen versus the Chinese yuan, euro and yen, it’s unlikely to rally the way it did in 2014 and 2015 as “valuation levels aren’t there,” said Eric Stein, Boston-based co-director of global fixed income at Eaton Vance Corp., which manages about $350 billion. Better economic data globally will also support the other currencies, he said.

Trade Dynamics

AMP Capital’s Naeimi said he bought dollars when the currency weakened against the yen earlier this month. The U.S. currency fell to 111.60 on Feb. 7, the lowest since November, and was at 113.88 as of 11:50 a.m. in Tokyo on Thursday.

The BOJ’s strategy to hold the nation’s 10-year bond yield at around zero percent and its unlimited debt purchases will overwhelm the positive impact from the nation’s current-account surplus, he said. He plans to take profit if the dollar strengthens to 125 yen.

Options traders are becoming more pessimistic on the yen. Risk reversals show the premium on contracts to buy Japan’s currency versus the dollar in a month’s time over those to sell has shrunk to almost zero from 2.69 percentage points on Nov. 8, the day of the U.S. election.

Naeimi said he is also seeking to profit from the euro’s gains versus the yen. While the ECB is set to wind down its asset-purchase program by the middle of the year, the BOJ will probably only do so in 2018, he said.

The manager said he plans to buy more euros should it weaken versus the yen on concern surrounding the elections in France, Germany and the Netherlands. He said he expects the euro to strengthen to 130 yen. The currency was at 120.98 on Thursday.

“Both have a current account surplus,” Naeimi said. “But Europe’s ahead in economic recovery and tapering.”

--With assistance from Mark Cudmore

To contact the reporter on this story: Netty Ismail in Singapore at nismail3@bloomberg.net.

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Nicholas Reynolds