FX Markets Weekly

FX Markets Weekly: Currencies Still Face Refunding Landmines

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FX Outlook: Currencies still face refunding landmines
A €120bn pledge for Greece would staunch the most serious sovereign funding crisis since the Latin debt defaults of the 1980s. Still, the rethink on European sovereign credit will persist. Although no other country faces solvency questions akin to Greece’s, the lack of a European lender of last resort will subject even good credits to short-term funding pressures, particularly when redemptions are high. This spring is one such period: peripheral Europe’s refundings are highest from May to July while refinancing needs for commodity exporters are trivial. Avoid the headline risk around EUR/USD and stick to euro shorts vs commodity FX and Asia

FX Derivatives
Implied vols experienced large swings this week on sovereign headlines; with holidays in the UK and Japan next week, expect light volumes to weigh on vols. Steep vol curves favor shorting back-end USD/JPY vol. Fading EUR/USD risk reversals and being long CAD-based correlations continue to look attractive.

Trade Recommendations
Orientate trades towards global and regional business cycles (commodity FX & Asia vs G-3) rather than unpredictable politics (Greece and China). Stay short EUR vs CAD, CHF, IDR and INR through a combination of cash and bearish seagulls. Sell the excess risk premium in euros (short 3-mo EUR/USD vol vs USD/CAD vol), and stay short the risk premium in sterling (sell 6-mo GBP/USD vol vs USD/CHF vol). Add to yen shorts: buy KRW vs JPY to accompany CAD vs JPY. Took profits on long NOK/SEK call spread. Stopped out of short NZD/CAD.

Technical Strategy
Overall trends are intact despite recent volatility. Commodity currencies should continue to outperform, with NZD playing catch up following the break of several key levels. Buy dips in NZD/JPY. AUD/USD is in position for a test, if not break of the medium-term range highs. Corrective pullbacks are buying opportunities. Stay short EUR/TRY and long USD/JPY.

FX Alpha Strategies & Manager Performance
G-10 carry is up and EM carry is down, both by about 1%. Macro hedge funds are down on the week, while currency managers continue to generate small gains.

Research Notes
The Nikkei’s impact on Japanese investment in foreign securities, (Junya Tanase)
Would the ECB ever intervene in EUR/USD?, (John Normand)

ENDS

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