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FX Crossroads

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Heightened FX volatility requires smooth sea

Thu, Apr 3 2008, 12:18 GMT
by Danske Research Team

Danske Bank A/S

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.

• Download the full report

Published on  Thu, Apr 3 2008, 12:21 GMT




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