FX Markets Weekly: USD is topping out

FX Markets Weekly: USD is topping out

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FX Outlook: USD is topping out
The dollar’s rally this year has been unusually broad for a low-rate environment, but this move is coming to an end. Key systemic risks are fading (Greece, US slowdown), and positioning is too defensive for the macro environment. The dollar should retrace broadly within its range. Close USD longs vs Europe and commodity currencies, and stay focused on the crossrates (long CAD vs rest of commodity bloc, short GBP within Europe).

FX Derivatives
GBP vols had a wild ride this week as cable spot hit new lows. Front-end vols in GBP crosses are the most expensive within the G-10, especially relative to other European vols. Sell a 2M GBP/USD vs USD/SEK vol swap spread. AUD/NZD vols remain low and skews cheap despite the rally in spot to new decade highs. Own OTM AUD calls to position for continued upside.

Trade Recommendations
The dollar is coming to the end of its Q1 bull run. Neutralise USD exposure and instead focus on crossrates, where the relative growth story is more compelling. In cash, take profits on short GBP/USD and NZD/USD, and losses on short AUD/USD, EUR/USD and long USD/NOK. Within the commodity bloc, stay long CAD vs AUD and NZD, and add a long vs GBP. Within Europe, stay short GBP vs EUR and CHF. Re-sell EUR/CHF ahead of the SNB: intervention is becoming ineffective when the Swiss economy and balance of payments are so strong. In options, stay long CAD/JPY (6-mo seagull) and short NZD/NOK (ratio put spread).

Technical Strategy
The setback of the USD seen in the last two weeks is not strong enough to question decisively the up-trend. Commodity currencies still face consolidation risk. NZD could be hit hardest, while CAD has scope to outperform. In JPY, the up-trend ran out of steam but stronger evidence for a sustainable reversal has not been delivered yet. Stay short EUR/USD, GBP/CHF, EUR/MXN, and long EUR/GBP and USD/NOK. Took profits on short GBP/USD.

FX Alpha Strategies
Carry strategies are slightly higher this week. The forward carry strategies and forward momentum overlay remain short USD across the board.

ENDS

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