Nomura: Terms-of-Trade Shock Theme — Models and Markets Still Signal Low Recession Risk
Summaries are public. PDF access requires an active membership; all members have the same access. Sign in
Nomura examines how the Middle East conflict and surging energy prices are reshaping global FX and rate markets. Major central banks, including the RBA, FOMC, ECB, and BoE, have all emphasized upside inflation risks. Markets have aggressively repriced rate hike expectations, with BoE pricing shifting by 74 basis points in two weeks to reflect 66 basis points of hikes by the end of 2026. Despite this, overall financial conditions have tightened only modestly.
The FX market continues to treat the conflict as a terms-of-trade shock, driving the US dollar higher, particularly against Asian net energy importers such as the Thai baht, Indian rupee, Philippine peso, and Japanese yen. Nomura maintains several high-conviction trades, including long USD/THB with a target of 34.0 by end-May, long USD/INR targeting 96.0 by end-April, long CNH/KRW targeting 221.0, and long NOK/SEK targeting parity at 1.00.
While financial conditions could tighten further if energy prices remain elevated, recession models still indicate relatively low risk. The Cleveland Fed model places the one-year recession probability at 17.8%, while Polymarket suggests a 34% chance. If a genuine demand shock materializes, the dollar may weaken within G10, though Asian currencies would likely continue to depreciate.