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2 September 2010
Editorial
Closed Trade Recommendations and OPERA 12 Forecasts EM FX Views on a Page Weekly performance of currencies versus the USD
AUD NOK SEK NZD PLN BRL ZAR CHF KRW TRY EUR CAD JPY INR MXN RUB CNY -0.3% GBP -0.8% 2.7% 2.5% 2.2% 1.8% 1.7% 1.6% 1.2% 1.2% 1.1% 0.9% 0.8% 0.6% 0.3% 0.3% 0.1% 0.0%
13 15
Figure 1: Currency performance against the EUR in the two episodes of peripheral spread widening
SEK
BarCap forecasts
4% 6% 8% 10%
3m forecast Returns against forwards
August 5 - August 26
USD Index EUR/USD USD/JPY GBP/USD USD/CAD AUD /USD NZD /USD EUR index EUR/GBP EUR/CHF EUR/SEK EUR/NOK Major EM USD/CNY USD/INR USD/KRW USD/RUB USD/ZAR USD/BRL USD/MXN
84.24 1.25 87.00 1.58 1.06 0.88 0.70 102.54 0.79 1.40 9.30 7.90 6.71 47.0 1125 30.3 7.55 1.80 12.85
2.1% -2.5% 3.4% 3.0% 0.7% -2.1% -1.5% -1.9% -5.3% 8.0% -0.3% -0.4% -1.1% -0.6% -5.0% -1.9% 2.5% 1.5% -2.3%
PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 16
EDITORIAL
2 September 2010
Note: We use these views as inputs to our OPERA portfolio. High confidence views are signified by an asterisk. All views expressed relative to the USD. Source: Barclays Capital
Technical strategy
The secular trend for USD/CHF is down. While that move has paused during the past two years, an unfolding bearish Pennant formation suggests it is far from over. Recent CHF strength on the crosses is driving USD/CHF closer to the edge of the pattern. Although current price action is benign and we expect further range trading in the months ahead, it is worth noting that 0.9915 may be an important tipping point. A close below 0.9915 would complete the formation, signal that the secular downtrend has resumed, turn our long-term outlook bearish (targeting 0.9500 on a near-term horizon) and suggest a growing risk for a return to trendline support at 0.8560 in the coming years. This is a heads up to that long-term risk.
Source: CQG
2 September 2010
Trade/date/macro views
Expiry
Initial rationale: In the short run, we think that EUR/GBP is likely to continue to range trade but that the second half of the year should see general GBP strength once the UK election is over and the MPC comes closer to tightening policy. Long 7m EUR/GBP 1x2 put spread (0.88 and 0.83 strikes), 18/03/10 0.8955 0.95% 18/10/10 0.8325 +2.55% +0.48pp
Initial rationale: Both carry and value look attractive, but returns will likely depend heavily on the various risk scenarios vis--vis higher US interest rates, China tightening, and sovereign fiscal issues. As a result, we recommend being long a less regime-dependent strategy VECTOR (for details and a description of current allocation, please see VECTOR: Value Enhanced Carry Trading of Exchange Rates, 15 October 2009 and VECTOR Monthly Rebalancing Update, 15 July 2010). Long VECTOR strategy, 18/03/10 219.8156 216.5243 -1.50% -0.43pp
Initial rationale: The spread between EUR/AUD and EUR/GBP implied vols is near historical lows, and our analysis suggests the spread tends to widen under various risk scenarios, including a repricing of the risk premium associated with China. Long 0.55 vega of 1y 12.1% EUR/AUD vol swap, short 0.45 vega of 1y 11.35% EUR/GBP vol swap, 17/03/10 EUR/AUD vol: 11.7% EUR/GBP vol: 10.9% 17/3/11 EUR/AUD vol: 12.74% EUR/GBP vol: 11.02% +1.64% -0.18pp
Initial rationale: Implied volatility curves are significantly upward sloping, suggesting that the market believes volatility has already bottomed, although we are just a few months into the recovery. We think this steepness is unlikely to persist. Although the trade did not reflect our initial rationale once the first leg expired, we decided to keep it because it is consistent with our bullish EUR/JPY view. Long 3m 132.50 EUR/JPY straddle, short 2y EUR/JPY strangle (strikes: 155.50 and 109.25), 25/9/09 132.90 0% 24/12/09 (expired) 27/09/11 107.93 -5.56% +0.33pp
Initial rationale: The volatility spread between USD/CAD and EUR/USD is at historically low levels, and this represents a true mispricing based on the risk scenarios considered. Furthermore, the themes considered in FX Quarterly support a rise in USD/CAD volatility and a fall in EUR/USD volatility, thereby implying a widening of the spread. Long 6m USD/CAD volswap at 13.80%, short 6m EUR/USD volswap at 13.75%, 25/06/10 USD/CAD vol: 12.90% EUR/USD vol: 14.35% 27/12/10 USD/CAD vol: 12.11% EUR/USD vol: 12.46% +1.30% +0.36pp
Initial rationale: A relative ranking of currency performance based on Barclays Capitals views for various asset classes and alternative risk scenarios suggests that the SEK will do well, while the JPY will not. Long 3m SEK/JPY call spread (12.4 and 13 strikes), 25/06/10 11.51 1.01% 27/9/10 11.59 -0.88% -0.04pp
Initial rationale: As fiscal adjustments become the major issue among the G4 economies, the GBP is in relatively better shape than the G3, with a budget proposal that has laid out an aggressive plan for fiscal consolidation and a weaker exchange rate to assist in the adjustment process. Long 6m worst of GBP call, EUR, USD and JPY put 2% OTM (strikes: 0.8080,1.5203,136.29), 25/06/10 EUR/GBP: 0.8242 GBP/USD: 1.4905 GBP/JPY: 133.62 0.75% 23/12/10 EUR/GBP: 0.8326 GBP/USD: 1.5397 GBP/JPY: 129.69 -0.32% -0.25pp
Initial rationale: A high inflation environment is likely to be associated with strong commodity prices CAD upside. Low inflation and global growth concerns may lead to an increase in risk aversion and another flight to quality USD upside. And a mixed picture could result in US monetary policy remaining very loose while the BoC tightens. USD/CAD is likely to move outside the 1.00-1.10 range it has been in since October 2009. Long 4m USD/CAD put at 1.00 and KO for the first 2m at 0.99, and Long 4m USD/CAD call spread 1.10 and 1.1250, with the second leg KI at 1.15, 25/6/10 1.0450 0.90% 28/10/10 1.0530 -0.37% -0.06pp
Note: Closed recommendations are at the end of this publication. Source: Barclays Capital
2 September 2010
Although peripheral euro area sovereign spreads have widened to levels last reached at the peak of the fiscal crisis earlier this year, the EUR has not weakened significantly. We believe that the banking stress tests are the main reason why this time is different. It has been dj vu all over again for global asset markets European government bond spreads in the euro area (EA) periphery have widened close to levels last reached during the euro area sovereign debt crisis circa three months ago, while the EURs recovery appears to have hit a road bump, falling sharply against the likes of the JPY, CHF and USD over the recent past. However, all is not exactly the same: the recent widening in peripheral bond spreads differs in some ways, and despite its recent weakness and the increase in spreads, EUR/USD is more than 7% higher than its trough in June. What explains the dampened response of the EUR to the increased worries about peripheral Europe, and how are things likely to develop? In our view, there were several important reasons why the EUR weakened so significantly in the earlier period. First, monetary policy expectations changed. Part of the reason was that fiscal policy was expected to be tighter, especially, but not only, in the peripheral economies. The natural corollary is somewhat looser monetary policy than would otherwise be the case. As the exchange rate is more closely linked with monetary policy, this would typically lead to a weaker real exchange rate. But part was also because the relationship between the ECB and the euro area governments had also appeared to change most notably when the ECB announced that it would start purchasing government bonds. The risk premium on the EUR also increased significantly. Again, there were several aspects to this, in particular: The EA appeared more vulnerable to weaknesses in global growth. Prior to the crisis, the EA had increasingly become a two-state economy. Some economies, notably Germanys, ran large current account surpluses and had relied to a large extent on
Figure 1: The recent rise and fall of EUR/USD coincided with changes in the real yield differential
0.8 0.6 0.4 0.2 1.4 0 -0.2 -0.4 -0.6 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Real yield differential (LHS) EUR/USD (RHS) 1.3 1.2 1.1 pp 1.7 1.6 1.5
April 12 - May 10
Source: Barclays Capital
August 5 - August 26
Note: The real interest rate differential is that implied by 10y swap rates. Source: Barclays Capital
2 September 2010
exports to drive growth, while others, for example Spain, had had booming domestic demand driven by credit and a large current account deficit. Following the crisis, it appeared likely that the German part of the EA would carry on saving but the Spanish part would increase its savings rate significantly. The result would be that a large part of demand for EA goods and services would need to come from outside the EA, and therefore a global slowdown would lead to a weak EUR at the same time as underperformance of global risky assets. This correlation would be expected to lead to an increased risk premium. The way the EA would work in the future had become less clear, to the point where many were wondering whether it would continue to exist. What was clear was that some important issues needed to be addressed and that the uncertainties that this brought about increased market nervousness about holding the EUR. The health of the EA banking system came into focus. There was widespread uncertainty about how exposed the banks were to EA sovereign debt, but the prospect of a vicious circle between the public finances and banks became a concern. So what has changed so that increased spreads have less effect on the EUR? An important factor has been the softening economic picture in the US, which has led to an increase in the perceived likelihood of future monetary easing from the Fed. As Figure 1 shows, the recent path of EUR/USD has moved with relative interest rates in the two economies. The weaker outlook for the US economy has been a key driver of the recent increase in global risk aversion. The increase in sovereign risk spreads has reflected the weakness of risky assets across markets falling equity prices, widening corporate credit spreads, rising implied volatilities etc. Previously, the sovereign issues had driven the risk aversion. Consistent with that, as Figure 2 shows, the EURs decline has been concentrated against the safe-haven currencies; the broad decline seen during the previous episode has not been repeated. There has been some negative news on the peripheral economies. S&P downgraded Ireland's sovereign credit rating one notch (to AA from AA-, outlook negative) on concerns about the rising cost of supporting the country's banks, and there was a weakerthanexpected Q2 GDP print in Greece (alongside the media reports of increasing internal tension Figure 3: Benchmark equity index correlations with the DAX Figure 4: Dispersion of sovereign yields and changes in sovereign yields
350 300 160 140 120 100 80 60 40 20 Dec-09 Mar-10 Jun-10 0 Sep-10
40%
60% 02 Sep 10
80%
100%
Dispersion in the daily changes of euro area sovereign bond yields (bp, right)
Source: Bloomberg, Barclays Capital
2 September 2010
in Greece on the fiscal austerity measures). But compared with the May episode, these events were relatively minor. This is reflected in the relatively higher (more positive) correlation between various European country benchmark equity indices and the German DAX equity index compared with the low levels during the April-May episode (Figure 3). Consistent with the above factors, the speed of the deterioration in the prospects for the peripheral economies has been much more muted. Figure 4 shows the evolution of EA government bond yields over the past year. The rise in spreads in May happened very quickly, and though the spreads have risen back to similar levels at the peak, the move this time has been much more orderly and come as much less of a surprise. And though the correlation between increased sovereign risk and increased demand for USDs is still intact in the currency forwards and money market as shown by the highly negative correlation between the dispersion of sovereign bond yields and the EUR/USD 1y basis swap (Figure 5) the widening of the EUR/USD basis swap has been much more modest this time around. One way to illustrate the reduced importance of the sovereign issues on the EUR during the current episode is to use our Financial Fair Value (FFV) model. Whereas EUR crosses were extremely undervalued with respect to our short-term fair value model for exchange rates in May, the current level of undervaluation is much smaller (Figure 6). Some of the undervaluation was clearly due to sovereign risk (which is not included in the FFV model): a framework similar to the FFV model incorporating sovereign risk shows that much of the undervaluation was clearly driven by a risk premium associated with the euro area. However, Figure 5 also shows that even after accounting for the sovereign risk effect, the undervaluation of EUR crosses has been much smaller this time around. The results from the FFV analysis suggest that sovereign risk has less of a negative effect on the EUR. In our view, an important reason why has been the calming effect of the bank stress tests. The fears of financial contagion emerging as a result of the increase in sovereign risk appear to have reduced. During the previous flare-up in fiscal risks, counterparty risk and the demand for dollars were key ingredients in transforming the flareup into a crisis. However, despite the increase in sovereign spreads, Libor-OIS spreads have been declining steadily since July, while demand for dollars at the ECB's auctions has been conspicuously tiny the most recent auction had only one bank bidding for $60mn for dollar funding, while the first USD auction, held on May 12, attracted seven bidders for Figure 5: Basis swaps are negatively correlated with sovereign yield spreads
100% 80% 60% 40% 20% 0% -20% -40% -60% -80% -100% -120% Feb-10 -15 -20 -25 -30 -35 -40 -45 -50 -55 Apr-10 Jun-10 Aug-10
Figure 6: Deviations from fair value based on the financial fair value model
2 1 0 -1 -2 -3 -4 -5 -6 -7 -8 -9 EUR/USD FFV May FFV with sovereign risk May
Source: Barclays Capital
EUR/CHF
EUR/GBP
EUR/NOK
EUR/SEK
Correlation between the sovereign bond yield dispersion and EUR/USD 1y basis swap (left) EURUSD 1y basis swap (bp, right)
Source: Bloomberg, Barclays Capital
2 September 2010
$9.2bn of funding. This is clearly a reflection of the stabilizing influence of the facilities put in place by the ECB, EU and the IMF some of which provide various EA sovereigns the ability to lend directly to their banks. We think there remains some EUR downside. Pessimism about the US economy appears overdone, and we think that the strength of the EA data in Q2 is highly unlikely to persist. However, while sovereign concerns are not likely to go away, risk appetite may return to the markets, which should buoy the EUR, and we think that it is unlikely that the sovereign concerns are going to escalate significantly. Add to that, we expect the US mid-term elections, which loom ever larger, to lead to increased concern about the US fiscal position. This is likely to become an increasingly important USD negative over the next few quarters. EUR/USD risks remain to the downside in the short run, but we may see a period of range trading while each currencys weak points battle it out.
2 September 2010
A not-too-different world
David Forrester +65 6308 3406 david.forrester@barcap.com
The BISs Triennial survey of foreign exchange activity 1 provides a good opportunity to view FX markets in a pre- and post-global financial crisis world. While FX markets do not look all that different, there are early signs of important long-term trends in FX markets.
Most of the drop-off in turnover growth could also be considered more structural than cyclical. The lions share of the decline in FX turnover growth was driven by a large decline in the growth in FX swap transactions. We think this is due to tighter controls on credit lines during and after the financial crisis, especially to corporates, which fits well with the (small) decline in FX turnover going through non-financial customers. The slower growth in FX swap transactions also possibly reflects a decline in the demand for investor hedging of foreign asset holdings via swaps.
BRL SGD
AUD
NZD HKD
INR HUF
EUR
Note: * Currency swaps are an exchange of a stream interest rate payments in different currencies, while foreign exchange swaps are an agreement to exchange of two currencies (principal only) at a time in the future. Source: BIS
Source: BIS
Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity (www.bis.org). The surveys are conducted in April every three years with the latest two surveys being conducted in April 2007 and 2010.
2 September 2010
CHF
respectively, this more than offsetting the decline in the USDs share (Figure 2). The G3s overall market share grew to 143% from 140%.
Large currencies such as the USD, GBP and CHF have not only lost ground to the EUR and JPY, but also smaller commodity and EM currencies
But there has been some drift toward G10 peripheral currencies, especially the AUD and CAD as well as EM currencies such as the TRY and KRW and BRL. (Turkey and Brazil have also seen a rise in their shares of global FX turnover within their borders.) These gains, along with the gains in the EUR and JPYs shares in turnover, were at the expense of the other currencies category, but also the GBP, USD, SEK, NOK and CHF. We think that there are a few interesting observations to be made here. 1. We believe that the modest shift toward the smaller G10 currencies as well as EM currencies is beginning to reflect the shift in the main drivers of global growth EM countries and the commodity producers that are helping to fuel their growth. This is a trend that we expect to continue into the future. The prominence of carry trades has also contributed to the rising market shares of TRY, BRL and AUD. The significantly higher interest rates in Turkey, Brazil and Australia that attract these carry trades are also likely to continue as long as EM growth outpaces growth in the G4 by a large margin.
Higher levels of FX turnover are coinciding with higher levels of liquidity, which is making currencies such as the AUD and CAD even more attractive for inclusion in central bank reserves
2. The growing share in turnover of the AUD and CAD is reflected in their improving levels of liquidity, according to our measures of liquidity. While the USD/JPY and EUR/USD remain by far the most liquid currencies (consistent with the G3s growing market share), the liquidity of the CHF and GBP have fallen to below or level with the liquidity in of the AUD and CAD (Figure 3). 3. We wrote in Are peripheral currencies reserve worthy?, FX Special, 8 July, 2010, that it is worthwhile for reserve managers to consider diversifying their baskets with the AUD and the CAD. The AUD and CAD represent good stores of value given their credibleinflation-targeting central banks, low levels of public debt relative to the G4 and their ability to act as hedges against commodity-based inflation. The AUDs and CADs lower levels of liquidity relative to larger G10 currencies may hold reserve managers back, but BIS survey data along with our own liquidity indicators suggest that this may be becoming less of an issue, especially relative to the GBP and CHF. The AUD overtook the CHF to become the fifth most-traded currency in the world in 2010. 4. The IMF COFER data suggest that the USD maintains a dominant share (61.5%) in central banks FX reserves and that this is down only modestly since 2007 (from 65.3%)
02/03/09 CAD
28/09/09 GBP
26/04/10 CHF
% share Q1 2010
2 September 2010
10
- Figure 4. The USD has made room in FX reserves for the EUR and other currencies. We believe that other currencies consist mainly of peripheral G10 currencies such as the AUD and CAD. The COFER data suggest that there is still a lot of diversifying away from USDs to be done by central banks.
2 September 2010
11
Trade/Date Long 8m 1.70 GBP call/USD put, short 8m 1.90 GBP call/USD put, 19/5/2009 Long worst of 4m ATM spot AUD, CAD and NOK calls/CHF put, 9/12/2009 Short EUR/SEK, target: 9.65, stop-loss: 10:30, 9/12/2009 Long 6m 1x1.5 USD/JPY call spread (89 and 95 strikes), 9/12/09 Short AUD/CAD, target: 0.91, stop-loss: 0.98, 9/12/2009 Long 3m 1.2630 AUD/NZD put, 4/3/10 Long USD vs basket of JPY and AUD (50:50), stop-loss: -1.5%, target: +3.0%, 18/03/10 Long 1m 1.27 EUR/USD put and short 1.23 EUR/USD put with a RKI at 1.19, 10/05/10 Long AUD, NZD, NOK versus USD, EUR and JPY basket, 25/6/10
Spot reference 1.5480 AUD/CHF: 0.9287 CAD/CHF: 0.9659 CHF/NOK: 5.6388 10.4907 87.79 0.9629 1.3110 USD/JPY: 90.01 AUD/USD: 0.9212 1.2925 AUD/USD: 0.8646 NZD/EUR: 0.5740 NOK/JPY: 13.7667
Current spot 1.6128 AUD/CHF: 0.9717 CAD/CHF: 1.0427 CHF/NOK: 5.5016 9.7244 94.55 0.9190 1.2490 USD/JPY: 90.10 AUD/USD: 0.8240 1.2192 AUD/USD: 0.9009 NZD/EUR: 0.5560 NOK/JPY: 13.8188
BarCap OPERA Recommended portfolio allocation (left) and cumulative returns (right)
0.50%
Weights 1%
0%
-1% JPY CAD NZD AUD NOK USD GBP EUR CHF SEK
0.00% 1-Jun-09
29-Sep-09
27-Jan-10
27-May-10
Note: BarCap OPERA (Optimised Exchange Rate Allocation) represents an optimal portfolio allocation for the week ahead that best takes advantage of our short-term views and the associated confidence levels. Cumulative excess returns since 3 October 2008, when OPERA was launched. See Behind the scenes of the BarCap OPERA for details. Source: Barclays Capital
2 September 2010
12
FORECAST TABLES
Forecasts Spot EUR/USD USD/JPY GBP/USD USD/CHF USD/CAD AUD/USD NZD/USD EUR/JPY EUR/GBP EUR/CHF EUR/SEK EUR/NOK
Source: Barclays Capital
Forecast vs Outright Forward 6 Month 1.30 89 1.67 1.09 1.08 0.84 0.69 116 0.78 1.42 9.25 7.85 1 Year 1.30 92 1.67 1.12 1.10 0.82 0.67 120 0.78 1.45 9.20 7.80 1 Month -1.0% -1.5% 2.0% 5.9% -0.2% -0.6% 0.8% -2.4% -2.9% 4.9% 2.0% 1.2% 3 Month -2.5% 3.4% 3.0% 10.8% 0.7% -2.1% -1.5% 0.8% -5.3% 8.0% -0.3% -0.4% 6 Month 1.4% 5.9% 8.5% 8.2% 2.4% -5.6% -2.1% 7.4% -6.6% 9.7% -1.0% -1.5% 1 Year 1.5% 9.8% 8.7% 10.8% 3.9% -5.8% -3.4% 11.4% -6.6% 12.4% -2.0% -3.0%
1 Month 1.27 83 1.57 1.07 1.05 0.90 0.72 105 0.81 1.36 9.50 8.00
3 Month 1.25 87 1.58 1.12 1.06 0.88 0.70 109 0.79 1.40 9.30 7.90
1.28 84 1.54 1.01 1.05 0.91 0.72 108 0.83 1.30 9.31 7.89
2 yrs 1.28 94 1.67 1.15 1.11 0.80 0.65 121 0.77 1.47 8.96 7.87
3 yrs 1.28 96 1.67 1.16 1.12 0.79 0.64 122 0.76 1.48 8.83 7.91
4 yrs 1.27 97 1.67 1.18 1.13 0.78 0.63 123 0.76 1.49 8.71 7.94
5 yrs 1.26 98 1.67 1.19 1.14 0.78 0.63 123 0.75 1.51 8.59 7.98
1.29 94 1.67 1.14 1.11 0.81 0.66 121 0.77 1.47 9.02 7.85
2 September 2010
13
Note: Daily updates for this table is available on Barclays Capital Live: https://live.barcap.com/BC/barcaplive?menuCode=MENU_FI_FX_GLB_FXH. Source for all tables: Barclays Capital
2 September 2010
14
EM FX VIEWS ON A PAGE
Tactical Currency bias Emerging Asia
TWD CNY KRW Bullish Bullish Bullish The Cross-Strait agreement is still one of our favourite structural transformation stories. We expect an increase in two-way variations in the CNY exchange rate, along with moderate appreciation. Although still bullish, we are slightly more cautious on the KRW owing to a smaller financial account surplus that reflects a more tepid interest rate outlook and tighter FX regulations. Structural reforms, putting the country on track to get to investment grade, and robust BoP suggest IDR strength. Thai rate normalization will likely continue to help modest THB appreciation. We remain bullish as the government pursues its multi-year restructuring programme, with the key catalyst being privatizations. Local equities markets and potential large IPOs will likely drive HKD. 0.41 Sell 4m USD/CNY NDF Sell USD/KRW via 1m NDF outright 0.52 Buy 20y IDR bonds, FX unhedged 0.24 0.20 Buy 3m USD/MYR put spreads 0.19 -0.60 0.19 3.65 3.20 3.15 3.05 3.00 2.80 0.53 4.25 4.20
Score (1-5)
SGD
Bearish
Sell USD/PHP 3m NDF Robust BoP and strong growth outlook indicate PHP strength despite recent underperformance. The longer term outlook for INR is increasingly clouded on account Buy 1m USD/INR ATMF put of elevated REER and the rising current account deficit. However, the short-term outlook is positive, supported by a weaker dollar and strong equity inflows. SGD is now trading at the top end of the NEER. We like using it as a Sell SGD/MYR spot funding currency for going long other Asians. COP is not misaligned with fundamentals and intervention risks are not as significant as historical valuations suggest, in our view. Strong domestic demand outlook and hawkish monetary policy. Growth peaking already; more a global beta play now. Bad technicals, potential political noise ahead, higher intervention risks. Attractive vol-adjusted carry, low beta to global drivers, lighter positioning and solid fundamentals are supportive of EGP. Benign inflation and recent shekel appreciation may make BoI less tolerant to much more shekel strength, especially if global risk concerns were to pick up. Better than expected Q2 GDP is positive for the currency but fiscal challenges and intervention risks remain. With a difficult political agenda this autumn and asymmetric intervention risks, we prefer to remain on the sidelines for now. With global growth momentum slowing and a less bullish outlook for oil, we see limited upside for further RUB strength in the short run. With no imminent reversal of Fidesz policies vis--vis IMF/EU negotiations, we still remain cautious on the HUF. A robust recovery, light positioning and actively managed FX deposits suggest the TRY will outperform during sell-offs. Recent positive economic data suggest that the recovery is taking hold a positive for the currency. Current aggressive reserve purchases are likely to make way for other measures to weaken the ZAR. New IMF funds are positive for Ukraine assets and will mean an additional powerful support for FX reserves positive for UAH FX intervention remains a big obstacle to appreciation.
0.05
2.60
-0.03
2.30
Latin America COP Bullish CLP MXN BRL Bullish Neutral Bearish
0.37 Short EUR/CLP 9m USD call/BRL put spread 0.24 0.15 0.17
Long EGP via 3m T-bills (USD funded) 2m USD put/ILS RKO call (strike 3.79, RKO 3.69)
Neutral Neutral Neutral Neutral/ bearish Bullish Neutral Neutral Bullish Neutral
6m 290-310 EUR call/HUF put (tail risk trade/hedge) Long TRY Mar12s/short EUR (0.5), USD (0.5), long TRY/short ZAR
Note: *Versus EUR. Changes in tactical bias denoted in bold. The variable score is an index that ranks EM currencies according to the vol-adjusted returns, PPP valuation, carry, systemic risk, basic balance/GDP and reserves accumulated over the past 5y/GDP (5 is the best possible score). For more details on the trade recommendations, please see the EM Dashboard. Source: Barclays Capital
2 September 2010
15
G10 FX
Aroop Chatterjee Chief FX Quant Strategist +1 212 412 5622 aroop.chatterjee@barcap.com Yuki Sakasai FX Strategy +81 3 4530 5026 yuki.sakasai@barcap.com Giulia Comotti FX Strategy +44 (0)20 313 42988 giulia.comotti@barcap.com Raghav Subbarao FX Strategy +44 (0)20 7773 4144 raghav.subbarao@barcap.com David Forrester FX Strategy +65 6308 3406 david.forrester@barcap.com Masafumi Yamamoto Chief FX Strategist, Japan +81 3 4530 5038 masafumi.yamamoto@barcap.com Paul Robinson Head of European FX Strategy +44 (0)20 777 30903 paul.robinson@barcap.com Mathieu Zaradzki Chief FX Options Strategist +33 (0) 1 4458 3138 mathieu.zaradzki@barcap.com
Emerging Markets
Michael Gavin Head of EM Strategy +1 212 412 5315 michael.gavin@barcap.com Guillermo Mondino Head of Latin American Research +1 212 526 7791 guillermo.mondino@barcap.com Peter Redward Head of Emerging Asia Research +65 6308 3528 peter.redward@barcap.com Matthew Vogel Head of Emerging EMEA Research +44 (0)20 7773 2833 matthew.vogel@barcap.com
2 September 2010
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