FX Markets Weekly: What The IMF Means FThe Euro

FX Markets Weekly: What the IMF means for the euro

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FX Outlook: What the IMF means for the euro
Once considered verboten, Europe has raised the possibility of IMF involvement in its sovereign funding crisis. IMF partnership cuts both ways: it would address the lender-of-last resort issue but raise policy options which Europe had hoped to hide (debt restructuring, EMU exit). Greece’s IMF quota ensures ample, cheap financing, but with conditionality which may be tougher than Europe’s. A facing-saving solution at the EU summit next week remains the preferred outcome. Keep most risk in the crosses given the policy risks around the broad USD trend. Also buy 12-mo USD/JPY upside with a 3-mo window knock-out.

FX Derivatives
Front-end implied vols have been driven below realized vols in many currency pairs. The sell-off in front-end NZD vol puts gamma performance at odds with extreme curve steepness: buy 2M strangles against 2M2M forward vol. Calls on CHF and CAD against a basket of GBP and USD offer a correlation-efficient way to position for appreciation in the two currencies.

Trade Recommendations
Keep almost all risk in the crossrates, which are unencumbered by Greece. Own currencies where growth is accelerating and rates repricing from low levels, and sell those where economies are lagging and rates markets overpriced. In cash, stay long CHF vs EUR, and re-enter longs vs GBP. Stay long CAD vs GBP, NZD and AUD; long NOK vs SEK (cash and options); and long AUD vs NZD (cash and options). Buy 12-mo USD/JPY upside (92 strike) with 3-mo window knock-out (86/94).

Technical Strategy
The USD defended its key-supports and keeps the door open for another bull-swing. Commodity currencies managed to extend their long-term bull-run but face stronger headwinds as major resistance barriers are reached. JPY has not given a definite reversal signal and seems set to extend its bull-run. The same applies for CHF, where all-time highs are looming against EUR. Stay short EUR/USD, EUR/CZK, GBP/CHF, EUR/MXN, NZD/CAD and long EUR/GBP.

FX Alpha Strategies
Carry strategies continue to move higher this week. Forward carry and both overlay strategies are entirely short the USD.

Research Notes
China revaluation wouldn't mean much for G-10 (John Normand)
Corporate Hedging Survey: More hedging, less hiring (Franklin-Lyons, de Kock, Sharma)
G10 fair value update: EUR and USD fair, Scandies and Swissie cheap (Gabriel de Kock)

FX Forecasts
Trough in USD weakness extended to Q3. See World Financial Markets published March 18 for details by country.

ENDS

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