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FX Crossroads
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It is all about risk
Wed, Nov 26 2008, 16:33 GMT
by Danske Research Team
Summary and conclusions
• In this edition's first article, we define a risk index comprising seven components: implied equity volatility, implied FX volatility, a high yield bond spread, gold, utilities vs. financials, treasuries vs. stocks and emerging markets CDX spread. We use this index to determine the current level of risk aversion and to detect which currencies are affected positively and negatively with risk. We conclude that market sentiment remains too uncertain to enter riskier carry strategies and therefore advise sticking to safe-haven currencies for now. Although USD is found to correlate negatively with risk aversion, we think the greenback has potential due to repatriation flows.
• In the second article, we take a look at the historical depreciations of AUD and NZD. Despite the huge falls, we prefer to stay short both AUD and NZD, preferably against USD. The outlook is less negative for AUD though, and we expect the recent rise in AUD/NZD to continue beyond 1.20 in the short term. We propose two interesting options strategies using reverse knock-out (RKO) put options.
Published on Wed, Nov 26 2008, 16:33 GMT
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Monetary policy and the link to FX: DKK and GBP
Wed, Nov 12 2008, 15:16 GMT
by Danske Research Team
Summary and conclusions
• After two independent Danish rate hikes, major interventions from the Danish central bank, the DKK has received a lot of attention - both from domestic and foreign market observers. We take a closer look at September's flow of funds data, the first Danish 30Y Govt bond auction in 14 years, and evaluate the outlook of a tighter policy rate spread between Denmark and Euroland, and for EUR/DKK. We foresee a narrowing of the rate spread in the near term and see EUR/DKK trading in the 7.44-45 range in the coming months.
• Bank of England's Quarterly Inflation Report was not cheering reading; the UK economy is set to contract in 2009 and inflation could fall below BoE's pain threshold of 1% in the forecast horizon. Despite the downbeat projections, we pencil in four reasons to be GBP bullish against EUR in the medium term.
• We take a look at relative economic surprises compared to movements in exchange rates. Unfortunately, we are unable to detect a strong relationship. However, important qualitative conclusions can be drawn. For example, the strong dollar rally in recent months coincides with a period of much more negative data surprises in Euroland than in the US. Given this observation, it is worth noting that data has recently turned a lot sourer in the US than expected. This suggests that the USD rally could loose steam.
• FX Crossroads is published every second Wednesday. Next publication date is 26 November.
Published on Wed, Nov 12 2008, 15:16 GMT
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The great carry bubble
Mon, Nov 10 2008, 10:20 GMT
by Danske Research Team
Summary and conclusions
Since last edition of FX Crossroads, we have revised our FX forecasts due to the recent extraordinary market developments, see Revised FX forecasts: G10 and EM. Most notable is that we expect the USD to strengthen even further against most other G10 currencies, the JPY excluded. We will publish November's edition of FX Forecast Update and Emerging Markets Briefer as scheduled on 14 November.
During the last few months we have seen an historical carry unwinding. In the first article of this edition of FX Crossroads we argue that the recent carry unwinding marks the end of what could be described as a carry bubble on the currency market, and that the large carry losses have merely corrected large imbalances. We furthermore analyse the dynamics of the carry trade and show that, following a sharp carry correction, the probability of new sharp losses tend to fall. Finally, we argue that it is still too early to turn positive on carry, and that investors should at least look for a turnaround in the OECD leading indicator.
October has been a challenging month for Danmarks Nationalbank (DN). The DKK has been under pressure; the DN has intervened and the Danish lending rate has been raised to 5.5%, bringing the policy spread between Denmark and Euroland to 175bp. The pressure is currently easing on DKK and deposit spreads are normalising. Thus, the potential for the DN to follow the ECB in cutting rates next week is emerging.
Published on Mon, Nov 10 2008, 10:20 GMT
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New FX forecasts − USD set to strengthen further
Wed, Oct 15 2008, 15:10 GMT
by Danske Research Team
Summary and conclusions
• We have updated our FX forecasts. We anticipate the financial crisis will continue to dominate the agenda in the short term and have kept the global recession theme as the major driver in the longer term. We believe in a broad-based dollar strengthening 12-months ahead.
• IMF's COFER statistics covering Q2 08 confirmed two of the main trends seen in recent years: i) World reserves are growing fast, although growth decelerated in Q2, and furthermore; ii) There has been no marked change in the dollar share of total reserves, although there are tentative signs of a reduction in the share held in dollars in favour of the euro in particular.
• For the past three quarters, net capital flows into the US have been positive. If this trend can be sustained it will provide important support to the US dollar. The other side of the Atlantic, the eurozone has seen a substantial net capital outflow in recent months. If the US can manage to stabilise its financial markets in the coming months, capital flows should continue to point to lower EUR/USD levels.
• The global credit crisis is now spreading to the most leveraged economies in the world and it now looks like there will be renewed focus on the IMF's role in international crisis management. We identify the most likely candidates for an IMF visit.
• FX Crossroads is published every second Wednesday. Next publication date is October 29.
Published on Wed, Oct 15 2008, 15:10 GMT
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Financial crisis − three scenarios for global markets
Wed, Oct 1 2008, 13:25 GMT
by Danske Research Team
Summary and conclusions
- • On Monday we outlined possible implications of the Troubled Asset Relief Programme (TARP) in the US (What does TARP mean for FX?). We did not stop to consider the impact of a rejection in the US House of Representatives, which in hindsight was a glaring oversight. Judging from the market reaction, we were not alone in this mistake. It is very hard to predict what happens next. But in our first article we present three scenarios as a way of creating a framework for thinking about the next phase in what has become a once in a lifetime financial crisis.
- • As a means of assessing the potential effect on the G10 currencies, of the three scenarios, we employ a partial analysis based on our short term financial model (STFM). The STMF is introduced in our second article, where we discuss what information can be extracted from the model, as well as evaluate current spot misalignments.
- • Finally, we consider the likely implication for Sterling of our revised Bank of England forecast - we now expect a first cut already in November. Other things being equal, the FX implication will probably be upward pressure on EUR/GBP in the short term followed by downward pressure in the longer term, due to the ECB also cutting rates. Accordingly, we still see room for EUR/GBP up to 0.82 in the short term, before returning to around 0.78 or lower in the longer term. A further strengthening of USD in the near term will, however, drag down on EUR/GBP.
- • FX Crossroads is published every second Wednesday. Next publication date is 15 October.
Published on Wed, Oct 1 2008, 13:25 GMT
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To catch a falling BRIC
Wed, Sep 17 2008, 16:16 GMT
by Danske Research Team
Summary and conclusions
- • The twin themes of a global economic slowdown and a financial crisis continue to drive financial markets. For currency markets the implication is that we are likely to see more of the now well-known trends towards carry-underperformance, yen and Swiss franc outperformance, just as we also expect the dollar to continue to rise relative to the euro.
- • We are looking for EUR/USD to fall to 1.35 in six months, USD/JPY to trade around 105, and EUR/GBP to reach 0.82 before the new year.
- • It is hard to find much good news for the emerging markets. A scary cocktail of intensified global credit worries, increased political and geo-political tensions and finally plummeting commodity prices is making the outlook for most emerging markets bleaker. The emerging markets are unlikely to escape the negative consequences of the global credit crunch and slower world growth. Investors clearly recognise these risks while increased (geo) political tension has done little to encourage risk appetite.
- • FX Crossroads is published every second Wednesday. Next publication date is 1 October.
Published on Wed, Sep 17 2008, 16:16 GMT
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EUR: Where's my 75bn?
Wed, Aug 6 2008, 12:43 GMT
by Danske Research Team
Summary and conclusions
- • The latest flow-of-funds report from the euro area paints a disturbing picture. In annual terms, the broad basic balance (net of current account, direct investment and portfolio flows) shows a deficit of EUR 47.5bn. The deficit is of a recent nature and owes partly to a surprise revision that has weakened the flow-of-funds by EUR 75bn during the past year. Histori-cally, the EUR correlates well with capital flows; hence, the current net outflow must be seen as a yellow flag for the euro, considering its rapid rise. A likely explanation of the euro's continued ascent despite the aggre-gated capital drain is a substantial improvement in the bilateral flows be-tween the euro area and the US. That swing owes particularly to aggres-sive net selling of US securities by EMU investors since last summer.
- • We take a look at a topic mostly neglected in the academic literature, but widely discussed among traders, ie, the seasonal pattern of exchange rates. After a general discussion on the statistical characteristics, where we list some stylized facts on the seasonality in FX markets, we develop a simple FX model in order to exploit the seasonal patterns. We find that the model is unable to generate an excess return out of sample, which suggests that investors should be careful when trying to take advantage of seasonal patterns. However, following seasonal patterns can be prof-itable when periods and currency pairs are carefully selected.
Published on Wed, Aug 6 2008, 12:43 GMT
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Why the kiwi cannot fly, and at what level NOK/SEK will break the range
Wed, Jul 23 2008, 15:09 GMT
by Danske Research Team
Summary and conclusions
- • In the first article we consider the outlook for the kiwi dollar and argue that the first rate cut by the RBNZ in an easing cycle could trigger a more prolonged sell-off in the kiwi - even though the market is already pricing significant monetary easing. This could have the potential to take NZD/USD below 0.70 going into 2009, as fundamental support generally continues to abate.
- • In the second article we provide several insights into NOK/SEK. After a fundamental evaluation approach, we find that key indicators, relative interest rates and equity performance explain little variation in the pair, whereas other factors, such as oil and the global activity outlook are periodically of major importance. The most interesting findings stem from information from the options market which has tipped the balance for NOK/SEK several times. Combining current market information with our expectations on other factors, we conclude that NOK/SEK range-trading can continue in the short and perhaps medium term, but that a move beyond 1.20 seems slightly more likely than a dip below 1.15 (spot 1.17).
- • In the third article we take a look at one of the drivers behind the rise in EUR/USD - the underperformance of US financials relative to euro area financials. We conclude that continued underperformance can delay the dollar strengthening and even contribute to further weakening.
Published on Wed, Jul 23 2008, 15:09 GMT
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GBP set to weaken further over summer
Thu, Jul 10 2008, 09:45 GMT
by Danske Research Team
Summary and conclusions
- • In this edition we focus on sterling with an emphasis on the July Bank of England (BoE) meeting and the recent positive shock to the UK flow of funds.
- • In the first article, we provide a preview for the upcoming BoE meeting on 10 July, when we expect the base rate to be left unchanged at 5.0%. This is also widely expected in the market; all 72 polled by Reuters last week expected no change. The market reaction should be limited.
- • In the second article, we consider the puzzle of how the recent large positive shock to the UK flow of funds can coincide with broad-based sterling weakness.
- • Overall, we still see the fundamental case for a weaker GBP and we expect that EUR/GBP will soon test new record-highs, having range traded for some time. Technically, a break-out of the current EUR/GBP triangle (peak 0.81 (16 April), through 0.7765 (2 May)) has the potential to send the pair towards 0.82, our three-month forecast, and possibly even beyond - perhaps as high as 0.84.
- • Finally, we provide an update on the latest IMF FX reserve data, which shows that world reserves are still growing fast and that there is yet to be seen any evidence of a marked reduction in the share held in USD.
- • FX Crossroads is published every second Wednesday. The next publication date is 23 July 2008.
Published on Thu, Jul 10 2008, 09:45 GMT
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Special edition: Focus on inflation and FX
Wed, Jun 25 2008, 15:09 GMT
by Danske Research Team
Summary and conclusions
- • In this edition we focus on the impact of rising inflation on currency markets whether through consumer or energy prices.
- • In the first article we argue that rising inflation could be bringing to an end 10 years of stable disequilibrium in global financial markets, causing an upset to the recycling of capital from Asian FX reserves and Middle Eastern current account surpluses, just as financial leverage could decline further.
- • In the second article we consider the most recent re-pricing of the outlook for the G10 central banks. We identify where central banks are in their cycles, and also the driving factors going forward. We generally expect money market rates to end the year well below what is currently implied. From a relative perspective, we see most value in selling USD and GBP against continental Europe and AUD.
- • In the final article we explore the link between oil prices and currency movements. We identify four G10 currency pairs that have moved less than the recent increase in oil process would suggest. All other things being equal, the rise in oil prices has increased the upside risk on EUR/USD and EUR/JPY, and the downside risk on USD/CAD and EUR/NOK (USD/NOK).
- • FX Crossroads is published every other Wednesday. Next publication date is 9 July 2008.
Published on Wed, Jun 25 2008, 15:09 GMT
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G10: FX implications of rising food and energy prices
Wed, May 28 2008, 15:24 GMT
by Danske Research Team
Summary and conclusions
• Food and energy prices have recently sky-rocketed. This naturally generates upward price pressure and inflation is either on the rise or set to rise in most economies. In this edition of FX Crossroads we examine which currencies will benefit, which will experience headwinds, and which currency pairs will look attractive in the near and longer term on the back of rising food and energy prices. In the near term EUR/USD and perhaps CHF/JPY are likely to head higher, while CAD/NOK is expected to turn lower. EUR/USD and AUD/NZD are both expected to rise in the longer term on higher energy prices. Investors are, however, advised to read these results with caution, due to the high degree of uncertainty about energy and food prices.
• Since the previous edition of FX crossroads EUR/USD: Will history repeat itself? financial distress has eased and key data releases have been on the soft side in the US, while proving surprisingly buoyant in the Euro area. Energy prices have surged and focus has switched markedly from economic growth concerns towards inflation fears. In general, market participants now anticipate G10 policy rates to be higher one year ahead except in New Zealand. The USD has been the worst performing G10 currency against EUR, and due to falling risk aversion JPY has lost ground, while carry-target favourites, AUD and NZD both have benefitted.
Published on Wed, May 28 2008, 15:24 GMT
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EUR/USD: Will history repeat itself?
Thu, May 15 2008, 10:16 GMT
by Danske Research Team
Summary and conclusions
- • EUR/USD rallied sharply from October 2000 to January 2001, but then spent 18 months trying to clear the January high. While we do not necessarily expect history to repeat itself, a dollar rally may still take longer to materialise than many now seem to expect. We show that while valuation argues in favour of USD strength, as it argued in favour of EUR strength in 2000, fair value estimates are only a long-term anchor for currency markets. Monetary policy cycles seem better in terms of setting the medium-term framework for a currency pair: If we are correct in expecting a turn from the Fed easing to the ECB easing during the summer, this suggests further downside for the euro. However, considering the risk of a prolonged downturn in the US as well as the present hawkishness of the ECB, we could well be in a policy vacuum for several months. Further, though EUR/USD bottomed out in 2000, an uptrend did not really get underway until capital flows turned in favour of the euro in 2002. Presently, net capital flows on both sides of the Atlantic remain supportive of the euro.
- • We currently have four open trading recommendations in the G10 space, all established during the past week. We are long EUR/GBP, short EUR/CHF, short EUR/NOK and short NZD/USD.
Published on Thu, May 15 2008, 10:16 GMT
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The puzzle of the missing NOK rally
Wed, Apr 30 2008, 14:52 GMT
by Danske Research Team
Summary and conclusions
- • The NOKs recent performance has failed to meet expectations ours included. Despite a surge in oil prices and a recent upswing in the do-mestic stock market the NOK has remained under pressure. The corre-lation with other high-yielding currencies has been high and a substantial risk premium has been attached to NOK. Looking forward, a return in risk appetite will most likely support NOK, which is also backed by sound domestic economic fundamentals.
- • In December 2007 we identified a slowdown in the global economy. On the back of that, we anticipated JPY, EUR and CHF to deliver positive re-turns and AUD, GBP and CAD to deliver negative returns. Buying this basket would to date have delivered an annualised return of 14%, with a Sharpe ratio of 1.13. We expect a continuation of the slowdown in the months to come and the signals of our business cycle analysis to be un-changed.
- • Volatility has fallen and carry has performed well since the middle of March. We expect volatility to begin trending higher again in May, bring-ing carry outperformance to an end.
- • Our EUR/USD target of 1.60 has been reached. We will publish new FX forecasts on Monday, 5 May.
- • FX Crossroads is published every second Wednesday. Next publication date is 14 May 2008.
Published on Wed, Apr 30 2008, 14:52 GMT
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Looking for relative value in GBP/NZD
Wed, Apr 16 2008, 12:03 GMT
by Danske Research Team
Summary and conclusions
• Despite unprecedented intervention by central banks around the world, financial markets remain under considerable stress. We continue to believe that the fundamental backdrop will lend support to JPY and CHF, just as we prefer currencies that are backed by hawkish central banks (NOK, EUR). Until the US can demonstrate either a clear trough in the economic cycle or a shift in sentiment regarding its financial sector we think the USD will have further to fall.
• EUR/USD has risen to new record highs, but appears to be overshooting fundamentals. Technically, the uptrend is well established, targeting new highs above 1.60, but a break below this weeks low at 1.5672 could very well see the beginning of a larger correction below 1.50.
• While the G7 made the first substantial change to the message on currencies since 2004, we consider the risk of intervention as modest.
• In the past seven months, GBP has fallen by 15% against the EUR and 13% vis-à-vis NZD. But the same set of fundamentals that triggered the slide in GBP now seems to threaten a similar decline in NZD. We consider the outlook for GBP/NZD and how to benefit from a rise.
Published on Wed, Apr 16 2008, 12:03 GMT
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Heightened FX volatility requires smooth sea
Thu, Apr 3 2008, 12:18 GMT
by Danske Research Team
Summary and conclusions
• On 1 April we presented our latest FX forecast update. We continue to expect further weakness in the US economy, a continuation of the financial crisis, and an outperformance by the Eurozone at least in the shortrun. We maintain our expectation of EUR/USD to reach 1.60 in three months and USD/JPY to reach 96 in six months.
• The present high-volatile environment presents new challenges. We introduce the FX Sharpe ratio, which is a convenient tool to assess exchange rate forecasts relative to forward rates when taking into account the risk of exchange rate fluctuations. This is extremely helpful when markets are nervous and risk of large swings in currency markets is overhanging. When evaluated against the forward rate and adjusted for expected volatility, we see opportunities in long NOK, short EUR/CHF and long AUD/NZD while the window is somewhat closed for JPY and GBP trades. USD trades seem moderately interesting.
• We also consider the effect on SEK from the Swedish privatisations and take a closer look at the latest world FX reserve data. We conclude that SEK will gain from the privatisations in the medium term and that there is still no sign of diversification out of USD.
Published on Thu, Apr 3 2008, 12:18 GMT
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On G7, SWFs, GBP/NOK and AUD/NZD
Thu, Feb 7 2008, 11:10 GMT
by Danske Research Team
Summary and conclusions
- • We do not expect this weeks G7 meeting to result in significant market changes. However, a shift in the stance in the CNY may be forthcoming.
- • In the first in a series of articles on sovereign wealth funds (SWF) we of-fer a guide to the size of the funds and to the origination of the assets. Future articles will consider the expected growth of the funds as well as the implications for financial markets.
- • We recommend selling GBP/NOK. We foresee serious challenges for the UK economy, and expect the BoE to be forced to cut faster than cur-rently anticipated in the markets, on the back of deteriorating domestic conditions and despite inflationary pressures. In contrast, we remain relatively bullish on the Norwegian economy and expect NB will raise rates again during the spring.
- • Australia raised rates as expected this week, but the RBA hawkish stance suggests that the peak in the policy cycle has yet to be reached and with it the cyclical turning point for AUD. To benefit from relative AUD strength, we recommend buying AUD/NZD spot.
- • For our thoughts on the outlook for G10 currencies and financial mar-kets, please see FX forecast update: Its a L-U-V thing.
- • FX Crossroads is published every second Wednesday. Next publication date is 20 February 2008.
Published on Thu, Feb 7 2008, 11:10 GMT
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USD, recessions, and Fed easing cycles
Wed, Jan 23 2008, 13:24 GMT
by Danske Research Team
Summary and conclusions
- • The past few days have seen much action on the financial markets. First, we had a significant sell-off in the equity markets, which sent JPY and CHF higher, and EUR/USD lower. Then, there was an inter-meeting response from the Fed cutting rates by 75bp. This brought some relief to the market and Mondays movements in the FX market were reversed.
- • In this edition of FX Crossroads we take a look at how USD has performed in periods following the initiation of an easing cycle by the Fed, and following the beginning of a US recession.
- • We find that the current easing cycle so far resembles the 1989 cycle most in terms of the dollars performance. That period was the only cycle where the dollar was weaker a full calendar year after the first rate cut. This historical evidence is consistent with our call for further dollar weakness in the coming months, but also with our expectation of a reversal to the dollar downtrend from around mid-2008.
- • In Australia, Q4 inflation numbers were released last night and surprised on the upside, posting an increase in underlying inflation of 3.6% y/y. This is well above the Reserve Bank of Australias official target zone and we renew our call for a 25bp hike at the 5 February meeting.
- • FX Crossroads is published every second Wednesday. The next publication date is 6 February 2008
Published on Wed, Jan 23 2008, 13:24 GMT
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New year, new worries
Fri, Jan 11 2008, 10:23 GMT
by Danske Research Team
Summary and conclusions
- • We continue to believe that dollar weakening has further to run, al-though, increasingly, we expect the multi-year increase in EUR/USD to be reversed around mid-2008. We target a rise to 1.52 within three months. However, the euro is unlikely to escape unharmed from the eco-nomic slowdown we predict, nor from the ECB rate cuts that we now pencil in for the second half of the year. We are increasingly confident in our forecast for USD/JPY to fall to 100 in the coming months.
- • We expect elevated volatility and fading risk-seeking to result in negative carry on a trend basis, at least in the first half of the year. Several cur-rency pairs show unusually high correlations with equity markets cur-rently, and a negative correction to global stock markets will tend to benefit JPY and CHF and weaken USD, AUD, EUR, NZD and USD.
- • We forecast EUR/NOK to fall further toward 7.75 in the coming months. We are less bullish on SEK, but see a good chance EUR/SEK can fall to-wards 9.30.
- • Recently published COFER data on FX reserves showed that for the first time, world FX reserves exceed USD 6 trillion. The well-debated move out of USD is yet to be seen.
- • FX Crossroads is published every second Wednesday. Next publication date is 23 January 2008.
Published on Fri, Jan 11 2008, 10:23 GMT
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NOK/SEK upside beckons − does dollar−bloc intervention?
Wed, May 9 2007, 17:06 GMT
by Danske Research Team
Summary and conclusions
- Both Norges Bank and Sveriges Riksbank left rates unchanged at the latest policy meeting but signalled that hikes would come soon enough. But for the two currencies, the similarities end there. We are looking for Norges Bank to hike rates beyond what is currently expected by the market, thus cementing the NOK’s role as a high-yielding currency in a positive carry environment, while we expect the Riksbank to stick to its view that “inflation is structurally low” and thus consolidate the SEK’s position as the G10 currency with the third-lowest rate support, only bettering the ever-struggling JPY and CHF. We thus see upside risks to EUR/SEK and expect the NOK to be able to match the strongly-performing EUR. We will thus be looking for an opportune moment to go long NOK/SEK.
- The commodity currencies - AUD, NZD and CAD - are hovering around multi-year highs and financial market observers are now speculating whether intervention in the currency markets by the respective central banks is approaching. Investigating the facts, the Reserve Bank of Australia (RBA) is already intervening on a minor scale, the Reserve Bank of New Zealand (RBNZ) is waiting until the interest rate cycle has peaked and sticks to verbal intervention for now, whereas Bank of Canada (BoC) is not in “intervention mood” at current FX levels. In our view, it is important to realise that FX intervention is not necessarily a ghost of the past.
Published on Wed, May 9 2007, 17:06 GMT
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New high beckons for EUR/USD; and for EUR/CHF
Fri, Apr 20 2007, 08:54 GMT
by Teis Knuthsen, Tobias Thygesen
Summary and conclusions
- Our Q2 forecast for a rise in EUR/USD to 1.36 has now been met. Several - if not all - of the drivers that persuaded us to forecast a weaker dollar still appear valid. On top of that, we worry that a rise in US protectionism will add to a structural risk premium in the coming months. Our medium term positive view on USD has been closely aligned with our macro view that the US would outperform Europe in the second half of the year. This view seems increasingly to be at risk. Further, we think there is a risk that a more violent dollar sell-off is in the process that could take EUR/USD well above the previous high of 1.3670 from December 2004. We are lifting our 3m forecast for EUR/USD from 1.36 to 1.38.
- Although Swiss National Bank Chief Roth repeated his concerns on the weak CHF and its possible inflationary effect in connection with last weekend ‘s G7 meeting, he did not sound overly worried and certainly did not give the impression of a man standing ready to hike rates over and above what we currently expect from the SNB. As we currently expect markets to continue to focus squarely on relative interest rates and ignore other potential FX drivers such as valuation and external balance issues, CHF looks set to weaken further in the months ahead. We are thus revising our EUR/CHF forecast higher and now expect EUR/CHF to trade at 1.66, 1.64 and 1.63 in 3, 6 and 12 months time.
Published on Fri, Apr 20 2007, 08:54 GMT
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G7 meets in Washington − AUD, NZD rallies further
Thu, Apr 12 2007, 16:44 GMT
by Rene Kallestrup, Teis Knuthsen
Summary and conclusions
- The IMF’s International Monetary and Financial Committee (IMFC) and the joint IMF - World Bank Development Committee (DC) meet in Washington this weekend. Prior to the gathering, as is customary, G7 finance ministers and central bank governors will get together. From a currency market perspective, the meetings are relevant in terms of comments on exchange rates as well as on global imbalances. We expect the IMF to report in detail on its thoughts on how to curtail imbalances but also expect the Fund to be short on practical steps to solve the situation. As for the G7, we expect no market moving comments on the yen or on carry trades. However, more pressure on China to allow for its currency to appreciate could emerge - despite rapid Chinese growth and a booming trade surplus, USD/CNY has flattened in recent months and EUR/CNY has risen. We continue to be biased for a rise in EUR/USD and in EUR/JPY.
- Both the Kiwi and Aussie dollars have now fully recovered from the end- February/early March sell-off, with AUD/USD notching up a 15-year high and NZD/USD trading at 2-year highs. Relative interest rates, strong commodity prices and renewed risk appetite in the financial markets explain a lot of the recent strong performance - but the time has now come to consider whether the comeback has further to run. Our feeling is that while it is too early for AUD and NZD to turn south yet, the rally has come too far to last beyond the current quarter.
Published on Thu, Apr 12 2007, 16:44 GMT
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GBP and NOK: positive outlook in uncertain times
Thu, Mar 29 2007, 08:38 GMT
by Arne Lohmann Rasmussen, Teis Knuthsen
Summary and conclusions
- This week we take a step back from the global issues and focus on the near-term outlook for the GBP and NOK. In the UK, we see a more than 50% chance of a rate hike next week. The surprise minority call for a rate cut at the March meeting was probably a false alarm as economic news since then has been strong, just as the sell-off in equity markets has ended. Admittedly, whether the Bank of England delivers in April or May is likely to be a finely balanced decision, and perhaps a more relevant question is whether there is more than the one rate hike priced by the short sterling strip left in this cycle. Since the policy tightening already under the BoE’s belt has yet to slow spending or the housing markets, it may seem a little premature to call the end of the policy cycle. A rate hike, or simply a rise in forward rates, will be supportive of GBP.
- Oil prices have been more important to the NOK in recent years than, say, relative interest rates. So far, the significant rise in oil and gasoline prices since January seems to have gone almost unnoticed by currency markets. But the fundamental case for oil remains strong and will continue to argue for a stronger NOK. We also continue to see policy rates rising to 5.0% by end-07. This suggests that the NOK will increasingly become a carry currency. We recommend buying NOK this week.
Published on Thu, Mar 29 2007, 08:38 GMT
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End of days or just the change of the season?
Thu, Mar 15 2007, 16:56 GMT
by Teis Knuthsen
Summary and conclusions
- After a brief hiatus, the correction in currency markets has continued this week. While the unwinding of carry profits was unusually sharp to begin with, we are now on par with the average of the worst episodes of drawdowns since 2004. If history is any guide, patience is called for since even in the best of times it can take two months for excess performance to clear the most recent peak. Further, pressure on short yen positions in the form of a deterioration in carry-to-risk as well as an improvement in Japanese capital flows should not be dismissed easily. Even if structural outflows re-emerge as a driver of yen weakness, we also need a fall in volatility to push EUR/JPY and USD/JPY back to previous highs.
- With fiscal year-end in Japan rapidly approaching, the market lore that the JPY strengthens in March is once again grabbing headlines. The fact of the matter is that USD/JPY tends to rise, not fall, in March but the relationship is not statistically significant. AUD/JPY and NZD/JPY tends to fall, however, in line with current movements. More significantly, we find a clear bias for the yen to weaken in the first week of April.
Published on Thu, Mar 15 2007, 16:56 GMT
Archive
- It is all about risk
Published On Wed, Nov 26 2008, 16:33 GMT - Monetary policy and the link to FX: DKK and GBP
Published On Wed, Nov 12 2008, 15:16 GMT - The great carry bubble
Published On Mon, Nov 10 2008, 10:20 GMT - New FX forecasts - USD set to strengthen further
Published On Wed, Oct 15 2008, 15:10 GMT - Financial crisis - three scenarios for global markets
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