Global FX Strategy 2010: New year, new lows
Click here for the full Note and disclosures.
Global FX Outlook 2010: New year, new lows (John Normand)
The dollar will turn in 2010, but not before marking new lows versus the euro (1.62), Swiss franc (0.91) and possibly the yen (82). This move is more than a carry trade, given broad weakness in the balance of payments.
Five global macro themes and top trades (Paul Meggyesi, John Normand)
The dollar will undershoot (worst-of basket on CHF, AUD, JPY); recover is discounted but exit strategies are mispriced (GBP/CHF, AUD/NZD); the end of inflation targeting? (NZD/NOK); a CNY revaluation’s impact on G-10 FX is overstated (EUR/JPY); and long-term valuation gaps to close in 2010 (EUR/SEK).
FX Derivatives: A macro model for vol and strategy implications (Arindam Sandilya, Talis Bauer)
A macro model for implied volatility suggests that VXY (3-mo implieds) should range between 10% and 14% in 2010, with spike risk more likely in Q3/Q4. Focus on vol carry for trading returns.
Long-term Technicals: Major transition ahead (Niall O’Connor,Thomas Anthonj)
The dollar will undergo a major consolidation phase over the next two months before resuming its bear trend.
Yen: What would push USD/JPY to all-time lows? (Tohru Sasaki, Junya Tanase, Yoonyi Kim)
USD/JPY can decline to 82 this year before rebounding. Even that level would not prompt BoJ intervention.
Euro: Few obstacles to new highs (Paul Meggyesi)
The euro’s drivers are less idiosyncratic than other currencies, but it will still rise in an environment of broad dollar weakness. Most counterarguments – export impact, China revaluation, euro break-up – are overstated.
Sterling: Funding currency or investment vehicle? (Paul Meggyesi)
Sterling’s undervaluation limits the scope for further weakness, but it is premature to expect a rebound. The trinity of deleveraging in the household, banking and public sectors remains a powerful obstacle.
Swiss franc: Franc to rally as SNB steps off the brake (Paul Meggyesi)
Like the yen, the franc is transforming into a pro-cyclical currency in this post-crisis world of low global yields. The currency will rally in 2010 as the SNB end its intervention (EUR/CHF to 1.46, USD/CHF to 0.91.)
Swedish krona: The myth of krona undervaluaton (Kamal Sharma)
The krona is not as undervalued as most think, but it can still rally 7% in 2010.
Commodity currencies: Where's the gold? (Gabriel de Kock, Matthew Franklin-Lyons)
NOK and AUD will lead the advance in 2010, driven by valuations and policy tightening. NOK is the valuation champ, while AUD benefits from Asian growth. Policy disappointment and valuations hobble CAD and NZD.
Risk scenarios and hedging strategies (Ken Landon)
An inflation surprise, a US funding crisis and US mid-term elections are three to hedge.
FX Alpha Strategies in 2010 (John Normand, Matthew Franklin-Lyons)
Carry should deliver roughly 8% returns as volatility ranges but central banks tighten. Forward Carry returns will moderate from 2009’s 10%. Simple price momentum will struggle in Q3/Q4 when the dollar turns.
Global FX Carry Trade Monitor (Yoonyi Kim)
The carry trade has returned as it always does post-recession, but it is half as large as it seems. Currency managers, global macro funds, CTAs and Japanese retail have moderate exposure. US and European have little.
Post-mortem on 2009 forecasts and trade recommendations (John Normand, Kamal Sharma)
Forecasts were correct on direction but too conservative on magnitude. 60% of trades were profitable.
EUR/USD targets raised to 1.62 by Q2 and 1.50 by Q4. USD/JPY should reach 82 by Q2 before rebounding to 89 at year-end. EUR/GBP should peak at 0.94 and AUD/USD at 1.02.