Much to sell, not so to buy

The last week was a confirmation of the dillema of investors for 2014 on the fx: choose the weakest among weak. There is not a single currency with truly strong fundamentals and there are many candidates for a short side. However, on the fx, you need a pair to make it happen.

The trouble is that the dollar is yet to deliver on the US policy shift. Yes it has been gaining for a while but not at a stunning pace and in an uneven manner, especially against European peers. That makes some traders reluctant to go long USD. But what to choose instead?

The last week proved that what’s cheap can be cheaper. The Aussie which seemed to be bottoming out sunk badly after poor local payrolls, reviving talks of a cut possibility. The CAD seems to be on the same page with investors looking forward to BoC to signal monetary softening this week.

Some pick the euro, citing economic recovery and support it with the EMU currency performance over the last couple of months. For us, though, that just means the EUR is a really bad buy right now. It remains elevated because EUR liquidity declined temporarily bossting market rates and supporting the currency. Once the effect fades, the EUR is bound to decline as the ECB needs to worry about too low inflation. CHF is basicaly at the same spot as the SNB just reiterated a willingness to protect 1,20.

Emerging currencies are on the retreat with the US rates climbing and political woes in Thailand and Turkey only made things worse.

In this environment GBP should look like a winner. The economy is recovering, the unemployment is declining quickly and Carney made clear long ago that more expansion was not needed. However, the GBP is already pricey. The FRA market more than discounts three hikes over the next 2 years and there are warnings that a strong GBP will curb growth.

Having that said, USD and GBP are our favorites with the EUR, CAD and emergings on the other spectrum. A direction in monetary policy is crucial and should have a final word over trends. For that reason we are not as pessimistic on JPY as the market: the policy is unprecedenced but this is something everyone got used to already.