Two scenario analyses of the G10 currencies - Nomura

Analysts at Nomura explained that based on the estimated sensitivities, we carried out two scenario analyses of the G10 currencies.

Key Quotes:

"In the first scenario, we assume the Chinese economy will perform resiliently while the Fed hikes. We expect the yield spread between the US and the other countries to widen, commodity prices to rise and risk sentiment to improve as the US and Chinese economies remain solid. JPY would fall the most owing largely to the widening of the yield spread. The currencies of resource-rich countries such as CAD, NOK, NZD and AUD may trade more resiliently even after higher US rates, if commodity prices are supported by Chinese growth. If risk sentiment improves further, these currencies could even outperform."

"If the Fed raises rates because of a solid Chinese economy, a short position on JPY against commodity currencies would be attractive, based on our estimation. In contrast, if the Chinese economy begins to weaken as US yields rise, we would expect commodity prices to fall, even if US manufacturing data improve. Reactions in risk sentiment would be mixed amid weaker China data and stronger US data (assumed 0.5 standard deviation risk-off)."

"Based on our estimation, USD would strengthen on its own, largely owing to US yields rising, and a drop in commodity prices would weaken the currencies of resource-rich countries significantly. CHF and JPY would depreciate less, outperforming against the commodity currencies, especially if risk sentiment reacts more to a Chinese slowdown than to strong US data."