FX Markets Weekly: After Greece

FX Markets Weekly: After Greece, a run on another sovereign?

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FX Outlook: After Greece, a run on another sovereign?

Now that Greece has activated the EU/IMF facility, the best case scenario is rapid approval and rejection of debt restructuring. But that script seems too hopeful for a funding program which has stumbled at every turn. The worst case is a funding crisis in other sovereigns, particularly since redemptions are heavy in some countries until July. Another run on a sovereign in Q2 is not as likely as with Greece, but redemption schedules are heavy enough to sustain market pressure Exploit today’s euro bounce to add to shorts on crosses.

FX Derivatives

With VXY hovering in the low 11s, implied-realized vol risk premium is negative for a large number of currency pairs. Risk premium built into vol curves is especially low in AUD/JPY, where 6M implieds now look low relative to S&P vol. Front-end GBP/USD implieds are rich relative to realized vol and the vol curve; sell GBP/USD 1M vol swaps versus buy 1M in 1M FVAs. Historically low implied levels and favorable positioning dynamics make risk-reward from owning CAD-based correlations attractive.

Trade Recommendations

Owning cyclical currencies with hawkish central banks is a much cleaner trades than shorting EUR/USD as a sovereign credit hedge. In cash, add longs in CAD/JPY to existing bullish seagull, and re-sell NZD/CAD. Exploit the end-of-week EUR bounce to increase shorts on the crosses: add short EUR/CAD (cash and options) and EUR/INR to existing shorts in EUR/CHF (cash and options) and EUR/IDR. Stay short USD/CAD (cash) and add in options. Hold long NOK/SEK (call spread), short GBP/CHF (options) and short 6-mo GBP/USD vs USD/CHF vol.

Technical Strategy

Euro underperformance should continue given regular failures to clear key-resistance barriers. Commodity currencies are still facing an increased setback risk while trading close to massive resistance across the board. The GBP out-performance faces much stronger headwinds now that decisive resistance clusters are in close reach. Stay short EUR/TRY, NZD/CAD and long USD/JPY.

FX Alpha Strategies & Manager Performance

Carry strategies are down slightly on the week. Rate momentum strategies are long the USD except against AUD and CAD. Hedge funds are down slightly and currency managers up slightly on the week.

FX Forecasts

EUR/USD targets lowered to 1.30 for Q2 and 1.35 in Q3/Q4, with follow-through revisions to EUR/GBP, GBP/USD and EUR/NOK.

ENDS

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