Short the Dollar as One of Your Summer Trades, Nomura Recommends

(Bloomberg) -- Temperatures are rising along the U.S. East Coast, but demand for the dollar is about to cool, according to a list of 12 summer macro trade ideas from Nomura Holdings Inc.

Japan’s biggest securities firm recommends shorting the dollar for the next three to four months against the euro and yen, according to a note emailed Wednesday by strategist Bilal Hafeez.

The greenback is the strongest since January, buoyed by expectations that the Federal Reserve will signal plans for continued gradual rate hikes when it releases its latest decision Wednesday afternoon in Washington. Yet Nomura predicts the U.S. rate advantage may start to ebb.

Short the Dollar as One of Your Summer Trades, Nomura Recommends

“Prospects of other central banks ending their ultra-easing policies will limit the impact of Fed hikes and we continue to be concerned about the U.S. twin deficits,” the firm’s analysts wrote. “Any dollar strength, like that seen recently, will likely be driven by risk aversion and position squaring, rather than anything more meaningful, so we stay short dollars for the next 3-4 months.”

FX Triggers

With the European Central Bank “on a (slow) normalisation path,” the appeal of the euro will grow, while the prospect of an “unstable risk environment” ahead should benefit the yen, the analysts wrote.

Along with accelerating U.S. inflation, Nomura’s strategists also predict that more Fed hikes and swelling supply will contribute to a bearish Treasury market.

“Investors will likely become better sellers of rallies and at the same time look for hedges ahead,” they wrote.

Here are the trade ideas as grouped in the note:

  • U.S. rates and global inflation
    • Short 5y5y “as a bearish overshoot hedge”
    • Long 1yr 2s5s CMS curve cap spread against OTM curve floor
    • Long US 5yr BEI, SPGBei iota re-widening, and short 30yr RPI
  • Euro and Japan rates
    • EUR 2s5s and 4y1y-1y1y EONIA steepeners
    • 10-year BTP/SPGB widener
    • Long JGB BEI
  • U.K. and Australia rates
    • Long 5f5y GBP vs short 5f5y USD
    • Reserve Bank of Australia still in play -– pay Nov OIS
  • G-10 FX
    • Short USD (against EUR, JPY)
    • EUR appreciation to re-accelerate (1.20 EUR/CHF digital)
    • Long NOK/SEK
    • Long AUD/NZD

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