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Top strategic trades for 2016 - ING
FXStreet (Delhi) – Research Team at ING, lists down their key strategi trades for the year 2016.
Key Quotes
• Short AUD/USD – Spot position, target 0.65
We see three main reasons: (1) China’s rebalancing efforts and the prospect of lower iron ore prices (one of Australia’s key exports) means that even after this year’s decline, AUD valuation is not particularly cheap; (2) more aggressive pricing of Fed tightening in late 1Q16/early 2Q16 will widen rate spreads and also hit risk assets; and (3) countries like Australia may prefer a weaker currency over lower rates given financial stability concerns.
Average into a short AUD/USD position. Sell 50% at 0.7300, Sell 50% at 0.7400. Target: 0.6500. S/L: 0.7550
• Short CNH/JPY – Spot position, target 17.50
Our 1H16 scenario sees US rates spiking at the short-end of the curve as the market moves to price a more normal Fed cycle. DXY should do well, although we believe USD/JPY will struggle to sustain a move through 125 based on valuation concerns. The next leg of the story will be pressure building on the PBOC to tolerate a weaker CNY and in this scenario risk assets may come under broad pressure. We want to be positioned for any possible repeat of the August 2015.
Average into a short CNH/JPY position. Sell 50% at 19.10, Sell 50% at 19.20. Target 17.50. S/L 19.45.
• Short GBP/USD – Option position, target 1.40
The shift in focus away from the BoE story and towards the true economic costs of a Brexit may well trigger a sharp re-pricing in GBP/USD. GBP’s downside protection from the positive Fed spillover effect (in the form of higher short-term UK rates) will dissipate, while a risk-off market environment stemming from a steeper Fed lift-off will weigh on GBP more meaningfully given its Achilles’ heel of a large current account deficit.
Buy 6-month GBP/USD put spread (upper strike at 1.4800, lower strike at 1.4200) for 1.07% of notional
• Short EUR/CHF – Option position, target 1.05
The SNB is going to have to match an ECB depo rate cut, perhaps by cutting the 3M CHF Libor target by 25bp to -1.00%. Yet, the SNB will also face an acceleration in ECB balance sheet growth too. We doubt the SNB will be prepared to step-up material FX intervention until the 1.05 area, just above the levels it intervened at this summer.
Buy 2-month EUR/CHF put spread (upper strike at 1.0700, lower strike at 1.0500) at the cost of 0.385%
• Long USD/BRL – Option position, Target 4.40
We see BRL as the most exposed EM currency to the key global macro risks of a China slowdown, lower commodity prices and Fed rate hikes. Domestic politics remains risk. Given our view of a potential dent to global risk appetite in 1H16 driven by a hawkish repricing of the Fed outlook, the zero cost USD/BRL 1x2 call spread looks attractive (risk is that the client is exposed from USD/BRL 4.70 onwards)
Buy 4-month USD/BRL 1x2 call spread (lower strike at 4.00, upper strike at 4.43) at zero cost
• Long USD/TRY – Option position, Target 3.10
While the political uncertainty is gone, two risks remain: geopolitics and the Fed’s lift off. The latter makes TRY particularly vulnerable if it translates into a pressure on risk assets globally. Moreover questions maybe asked about the independence of the central bank and the extent to which the CBT may be willing to hike rates to offset the pressure on TRY. High Turkish inflation eats into the TRY fair value.
Buy 4-month USD/TRY upside seagull for 0.31% of notional (buy call at 3.00 strike, sell call at 3.10 strike, sell put at 2.80 strike), enter when spot at USD/TRY 2.8800
• EUR/CZK – Forward points position, Target -310
We position for a market pressure on the EUR/CZK floor via 12-month forward points. Our view that that the CNB has enough fire power to defend the floor during H1 2016 means that short EUR/CZK spot is unlikely to be a fruitful strategy. Rather, it is the forward points (or cross currency basis) that neatly capture the EUR/CZK supply-demand dynamics in an environment where the floor remains intact but under pressure.
Position for EUR/CZK 12-month forward points moving lower: Target -310, current -225, S/L -175
• Short USD/RUB – Option position, Target 55.00
We see RUB as a wild card for 2016. Although outlook its highly uncertain, the potential gains makes risk-managed long RUB strategies attractive in light of its scope for a material rebound. RUB is extremely undervalued and potential rebound oil price and/or news on potential sanction-easing would send the currency materially higher.
Buy deep OTM 9-month USD/RUB put with a strike at USD/RUB 60 for 1.50% of notional
Key Quotes
• Short AUD/USD – Spot position, target 0.65
We see three main reasons: (1) China’s rebalancing efforts and the prospect of lower iron ore prices (one of Australia’s key exports) means that even after this year’s decline, AUD valuation is not particularly cheap; (2) more aggressive pricing of Fed tightening in late 1Q16/early 2Q16 will widen rate spreads and also hit risk assets; and (3) countries like Australia may prefer a weaker currency over lower rates given financial stability concerns.
Average into a short AUD/USD position. Sell 50% at 0.7300, Sell 50% at 0.7400. Target: 0.6500. S/L: 0.7550
• Short CNH/JPY – Spot position, target 17.50
Our 1H16 scenario sees US rates spiking at the short-end of the curve as the market moves to price a more normal Fed cycle. DXY should do well, although we believe USD/JPY will struggle to sustain a move through 125 based on valuation concerns. The next leg of the story will be pressure building on the PBOC to tolerate a weaker CNY and in this scenario risk assets may come under broad pressure. We want to be positioned for any possible repeat of the August 2015.
Average into a short CNH/JPY position. Sell 50% at 19.10, Sell 50% at 19.20. Target 17.50. S/L 19.45.
• Short GBP/USD – Option position, target 1.40
The shift in focus away from the BoE story and towards the true economic costs of a Brexit may well trigger a sharp re-pricing in GBP/USD. GBP’s downside protection from the positive Fed spillover effect (in the form of higher short-term UK rates) will dissipate, while a risk-off market environment stemming from a steeper Fed lift-off will weigh on GBP more meaningfully given its Achilles’ heel of a large current account deficit.
Buy 6-month GBP/USD put spread (upper strike at 1.4800, lower strike at 1.4200) for 1.07% of notional
• Short EUR/CHF – Option position, target 1.05
The SNB is going to have to match an ECB depo rate cut, perhaps by cutting the 3M CHF Libor target by 25bp to -1.00%. Yet, the SNB will also face an acceleration in ECB balance sheet growth too. We doubt the SNB will be prepared to step-up material FX intervention until the 1.05 area, just above the levels it intervened at this summer.
Buy 2-month EUR/CHF put spread (upper strike at 1.0700, lower strike at 1.0500) at the cost of 0.385%
• Long USD/BRL – Option position, Target 4.40
We see BRL as the most exposed EM currency to the key global macro risks of a China slowdown, lower commodity prices and Fed rate hikes. Domestic politics remains risk. Given our view of a potential dent to global risk appetite in 1H16 driven by a hawkish repricing of the Fed outlook, the zero cost USD/BRL 1x2 call spread looks attractive (risk is that the client is exposed from USD/BRL 4.70 onwards)
Buy 4-month USD/BRL 1x2 call spread (lower strike at 4.00, upper strike at 4.43) at zero cost
• Long USD/TRY – Option position, Target 3.10
While the political uncertainty is gone, two risks remain: geopolitics and the Fed’s lift off. The latter makes TRY particularly vulnerable if it translates into a pressure on risk assets globally. Moreover questions maybe asked about the independence of the central bank and the extent to which the CBT may be willing to hike rates to offset the pressure on TRY. High Turkish inflation eats into the TRY fair value.
Buy 4-month USD/TRY upside seagull for 0.31% of notional (buy call at 3.00 strike, sell call at 3.10 strike, sell put at 2.80 strike), enter when spot at USD/TRY 2.8800
• EUR/CZK – Forward points position, Target -310
We position for a market pressure on the EUR/CZK floor via 12-month forward points. Our view that that the CNB has enough fire power to defend the floor during H1 2016 means that short EUR/CZK spot is unlikely to be a fruitful strategy. Rather, it is the forward points (or cross currency basis) that neatly capture the EUR/CZK supply-demand dynamics in an environment where the floor remains intact but under pressure.
Position for EUR/CZK 12-month forward points moving lower: Target -310, current -225, S/L -175
• Short USD/RUB – Option position, Target 55.00
We see RUB as a wild card for 2016. Although outlook its highly uncertain, the potential gains makes risk-managed long RUB strategies attractive in light of its scope for a material rebound. RUB is extremely undervalued and potential rebound oil price and/or news on potential sanction-easing would send the currency materially higher.
Buy deep OTM 9-month USD/RUB put with a strike at USD/RUB 60 for 1.50% of notional
Author
Sandeep Kanihama
FXStreet Contributor
Sandeep Kanihama is an FX Editor and Analyst with FXstreet having principally focus area on Asia and European markets with commodity, currency and equities coverage. He is stationed in the Indian capital city of Delhi.
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