FX Markets Weekly: Exits Lead to a Higher Dollar

FX Markets Weekly: the Exits Lead to a Higher Dollar

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FX Outlook: The exits lead to a higher dollar

Over the past six weeks several major central banks have surprised with the timing and course of their exit strategies. The net result has been dollar positive, and while it is premature to conclude that the dollar is transforming from a funding to an investment currency, it can still rally further this month. Policy remains hazy, data are mixed and positions are not overly long dollars. Stay long USD vs commodity currencies and add shorts in European FX to the basket.

FX Derivatives

VXY is in the middle of its year-to-date trading band. Stay neutral on gamma. Own NZD vol over EUR vol as an efficient hedge against swoons in risky markets. USD/JPY vols continue to look rich in intermediate expiries - sell 3M3M FVAs. CAD-based correlations look cheap historically and relative to realizeds, making basket options efficient vehicles for investors with a bullish view on spot.

Trade Recommendations

Technical it may have been, but the symbolism of the Fed’s discount rate hike provides a positive reason to add to USD longs. Broaden the basket by selling the most vulnerable European currencies in cash (EUR and GBP), with GBP increasingly at risk from fiscal tensions, deteriorating economic data and a uniquely dovish central bank. Take profits on a 12-mo EUR/SEK ratio put spread on softening Swedish inflation. Stay positioned for a change in commodity currency leadership. Sell NZD vs CAD and hold short AUD vs CAD. Stay short AUD and NZD vs USD, Also stay short EUR/PLN, long EUR/GBP and short GBP/CHF (cash and options).

Technical Strategy

The USD bull-trend should gain further ground in coming weeks. JPY is again at risk of entering a broader down-consolidation but key triggers for confirmation have not been taken out yet. Commodity currencies have run into massive resistance particularly against EUR, from where an intermediate consolidation is expected to unfold. Stay short EUR/USD, GBP/USD and EUR/MXN, and add a long in USD/NOK.

FX Alpha Strategies

Carry strategies are flat this week. The Forward Carry strategies remain long the USD across the board while price momentum is neutral.

Research Note

Exiting EMU: The legal, the likely, and the ludicrous (John Normand)

ENDS

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