FX Markets Weekly: Loose Wheels, Firm Dollar

FX Markets Weekly: Loose Wheels, Firm Dollar

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FX Outlook: Loose wheels, firm dollar
Most global activity data give the impression that the wheels are coming off the global recovery. That view is too extreme, but the wheels are loose enough to extend USD strength into mid-March. Stay long USD vs most currencies but the yen, and stay short GBP on the crosses. Record shorts in the euro provide occasional support for the currency, but Greece will linger for long enough to see another dip below 1.35.

FX Derivatives

Vols remain benign in the middle of spot-market gyrations. Stay overweight NZD/USD versus EUR/USD in gamma. Given relative gamma performance and better vol slide along the curve, buy 6M EUR/CAD put spreads financed with 6M EUR/GBP put spreads in premium-neutral amounts. USD/CAD skews look overly bid for CAD puts; use risk-reversals as vol-efficient bullish CAD vehicles.

Trade Recommendations

Risky markets will remain unstable until data improve and policy threats are better understood (monetary in EM, fiscal in G-10). Stay long USD vs. EUR, GBP, AUD, NZD and NOK (cash). Within the commodity bloc, stay long the least-vulnerable to a rates repricing: own CAD vs AUD and NZD. Within Europe, the market has aggressively targeted fiscal vulnerabilities in EUR but has barely started with GBP. Stay short GBP vs EUR and CHF. Stay short EUR vs. PLN (cash) and long NOK vs. NZD (ratio put spread). Hold JPY short vs. CAD (6-mo seagull).

Technical Strategy

USD should extend its bull trend. Commodity currencies are due additional short-term weakness vs USD following this week's reversal patterns. The reversal in EUR/commodity FX crosses also confirms a short-term correction. GBP underperformance extends on a broader basis following the violations of critical levels. JPY outperformance is likely to continue over the short term as the reversals in USD/JPY and cross JPY reassert the broader range view. Stay short EUR/USD, GBP/USD, AUD/NZD and EUR/MXN, and long USD/NOK and EUR/GBP.

FX Alpha Strategies

Carry is down 1% on the week for G-10 and EM baskets and is in the red for the year. Forward carry, based on rate momentum, is mixed on the dollar: long USD vs commodity FX vs but short USD vs Europe.

Research Notes

Corporate hedging recommendation: participating in GBP downside (Matthew Franklin-Lyons)
The real impact of JPY/KRW (Junya Tanase and Yoonyi Kim)

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