Early FX

March 31st, 2016 6:27 am | by John Jansen |

Via Kit Juckes at SocGen:
Things may move around a little before the day is done but it looks as though Q1’s best G10 currency trade was to sell GBP/JPY, though widening the net you’d have done even better buying MYR, RUB or BRL. Meanwhile, the only significant currencies to have underperformed the dollar (other than GBP) are the Mexican Peso and Indian Rupee. Overall, a mixed bag but one with a distinctly ‘risk-on’ tone.

The bulk of the gains by the three high-performing currencies came in March, with gift-wrapping from the Fed and a nice bow tied by the ECB. Of course, a recovery in oil prices helped, while the post-Chinese New Year period has seen calm return for the CNY, helping all of EM but Asian currencies in particular.

So, what of Q2? This morning’s weekly Japanese securities investment data reinforce my view that one Q2 theme will be some further unwinding of yen strength. Last week saw the biggest net sales of Japanese bonds and equities by foreigners (Y2.2trn) since 2008 and over the last four weeks, we have seen the biggest net buying of foreign bonds by Japanese investors since at least 2000 (Y4.7trn). If speculative yen longs are offsetting capital outflows and keeping USD/JPY in the current range, then I know which of these two forces is likely to win out in the end. My colleague Olivier Korber thinks the range can hold but I’d like to be short yen for as much of Q2 as possible. The current chosen vehicle is SEK/JPY, which is a pretty ‘risk-on’ trade but also one that will benefit from any further uptick in inflation in Sweden.

Weekly Japanese and foreign bond and equity flows


Another big Q2 theme will be ‘Brexit’ of course. The quality of the debate is still dire but one much-cited threat to sterling is the combination of a large current account deficit and the uncertainty caused by the vote. Q2 data are due today along with final GDP figures and March money supply data. We expect the deficit to have widened slightly to GBP 20.5bn, about 4.4% GDP. Not as bad as it was at the peak but more fodder for those who want to scare voters into voting to remain in the EU and as such, another negative for sterling. We’ve been using GBP/NPK shorts as out preferred trade to be short the pound, and while this has quietened down a lot we’re happy to stick with it. Short sterling against a weighted basket of USD and EUR appeals, too.

UK current account balance


The rest of this morning’s data saw a 6.6% y/y increase in Australian private sector credit growth and a strong 3.3% m/m gain in Korean industrial production. Ahead, Euro Area CPI is expected to edge up to 0.9% y/y, German unemployment to fall another 10,000, and we get US initial jobless claims and Chicago PMI. I can’t see anything there to move EUR/USD out of this range, and despite the bullish tone I still think it looks a little high within than rate (not enough to go short, mind you). Crude prices continue to drift lower as inventory levels grow, but that hasn’t yet done anything to really hit risk sentiment or support the dollar. If we got robust US data tomorrow and oil continued to drift lower, that would damage risk sentiment and, for that matter hurt the CAD too. But there are too many ‘ifs’ there to trade.

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