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FX STRATEGY | FX WEEKLY
Global FX Plus
18 June 2015
Non Independent Marketing Communication
Current FX Recommendations1
Portfolio Overview: Spot Trade Recommendations
Entry Date Position Entry Rate Stop Loss Target Rate Close Rate Close Date Return (%)
21-May-15 Short AUDNZD 1.0780 1.0945 1.0340 1.0945 10-Jun-15 -1.47%
27-May-15 Long USDNOK 7.8030 7.6900 8.1500 7.6900 10-Jun-15 -1.49%
03-Jun-15 Short EURUSD 1.1120 1.1340 1.0500 1.1340 04-Jun-15 -1.94%
20-May-15 Long GBPSEK 12.9750 12.7600 13.4000 12.7600 03-Jun-15 -1.65%
18-Mar-15 Long EURSEK 9.2000 9.2000 9.6000 9.300 20-May-15 1.09%
05-May-15 Long EURUSD 1.1200 1.1390 1.0400 1.1390 07-May-15 -1.70%
01-May-15 Long EURNOK 8.4550 8.3500 8.7715 8.3500 07-May-15 -1.37%
Total 2015 9.82%
2
Portfolio Overview: Option Trade Recommendations
Entry Date Position Entry Rate Close Rate Close Date MTM (%)
3m EURJPY 1x2x1 put fly buy 0.80% 0.57%
11-Jun-15 -0.43%
138.00/132.00/126.00 for 78bp (138.85) (140.10)
The EUR is a more attractive funding currency and market focus is likely to swing back to the EUR and away from the JPY
6 month EURUSD RKO: 1.1000 strike with KO 0.51% 0.39%
04-Jun-15 -0.35%
0.9950 1.1270 1.1400
EUR positioning is now close to neutral levels, setting the stage for renewed weakness.
1 Year EURGBP ratio put spread 1x2x1 buy 1x
1.05% 1.07 %
14-May-15 0.72 put, sell 2x 0.68 put buy 1x 0.64 put. 0.03%
(0.7210) (0.7177)
Restructuring of EURGBP trade on 8 Jan-15.
We expect the Bank of England to hike in Q1 2016. This strategy looks to take advantage of a grind lower to 0.68 year-end.
Buy 3 Month EURNZD 1.45 put. Sell 3 Month 0.00% -2.57%
07-May-15 -2.57%
1.63 call. (1.5178) (1.6450)
NZD offers the most attractive carry opportunity in G10, with curve carry remaining at the highest level of the last 5 years.
1 Year USDCHF call spread buy 1.00 sell 1.12.
0.27% 0.85%
01-Apr-15 Restructuring of USDCHF call spread entered 0.58%
(0.9700) (0.9175)
on 22 Jan 15.
The impact of negative rates and deteriorating BoP to weaken the CHF vs. the USD.
6 Month USDJPY RKO premium rebate: 120.00 0.74% 2.34%
28-Jan-15 3.25%
strike with KO 130.00. (118.00) (123.00)
The reverse knock-out is positioned for a grind higher in USDJPY and gives a significant discount to the vanilla.
1 Year EURGBP Ratio Put Spread 1x2x1 buy 1x
1.57% 3.95%
08-Jan-15 0.78 put, sell 2x 0.72 put buy 1x 0.66 put. 14-May-15 2.27%
(0.7815) (0.7210)
Restructured.
3 Month NZDJPY seagull buy 91.40 call sell 0.00% 0.00%
12-Feb-15 14-May-15 0.00%
85.00/80.00 put spread. (88.20) (89.65)
Total 2015 6.55%
3
BNP Paribas STEER Model Recent Quant Trading Signals
Entry Date Position Entry Rate Stop Loss Target Rate Close Rate Close Date Return (%)
16-Jun-15 Short USDPEN 3.1610 3.1720 3.1389 -0.04%
16-Jun-15 Long EURCHF 1.0497 1.0046 1.0913 -0.11%
15-Jun-15 Long EURPLN 4.1495 4.1327 4.1831 0.62%
15-Jun-15 Long EURUSD 1.1198 1.1063 1.1524 1.81%
29-May-15 Short USDJPY 123.98 125.93 120.45 0.89%
16-Jun-15 Short USDBRL 3.1269 3.0889 17-Jun-15 1.22%
Total 2015 25.46%
Overall portfolio 2015 41.83%
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New FX forecasts
Spot Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16 Q4 16
New 1.09 1.04 1.02 1.00 1.00 1.02 1.04
EURUSD 1.1415
Old 1.04 1.02 1.00 0.98 0.95 1.00 1.02
New 1.51 1.51 1.50 1.47 1.45 1.48 1.49
GBPUSD 1.5869
Old 1.46 1.48 1.47 1.44 1.38 1.45 1.46
New 0.97 1.04 1.08 1.10 1.10 1.08 1.06
USDCHF 0.9177
Old 1.02 1.06 1.10 1.12 1.16 1.10 1.08
New 124 127 130 132 132 134 136
USDJPY 122.85
Old 124 125 128 128 130 132 135
New 0.72 0.69 0.68 0.68 0.69 0.69 0.70
EURGBP 0.7181
Old 0.71 0.69 0.68 0.68 0.69 0.69 0.70
New 135 132 133 132 132 137 141
EURJPY 140.24
Old 129 128 128 125 124 132 138
Source: BNP Paribas
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The Fed remains data The USD has sold off following the Fed meeting, much as it did after the March
dependent FOMC meeting, which also saw a reduction in the Fed funds projections. However,
we would emphasise that a majority of FOMC members continue to anticipate at
least two rate hikes before the end of 2015. Moreover, the message from the Fed
is clearly one of data dependency if data continue to improve over the summer,
markets will be forced to bring forward its pricing in of Fed hikes closer to our
September forecast for lift-off (our economic teams September forecast remains
in place after the meeting).
We expect rates to adjust Following the FOMC meeting, the implied yield on the January Fed funds contract
in the USDs favour over has fallen back to 37.5bp, just 25bp above the current effective rate. Our rates
the summer strategy team continues to anticipate a significant upward adjustment in US front-
end rates over the summer. While the USD has benefitted from policy easing in
other G10 economies over the past year, we expect higher US rates to drive a new
phase of USD gains over the summer.
Position for USDs Following the choppy May and early June price moves, we have brought our spot
upside via options recommendations portfolio to flat. We have also shifted our EURUSD forecast
profile such that we know see the pair bottoming at parity in Q1 2016 rather than at
0.95 in Q2. However, we continue to favour maintaining exposure to the USDs
upside via derivatives structures. Positioning via RKOs is particularly attractive now
in light of the sensitivity of the Fed outlook to big moves in the USD.
Chart 1: Market priced for late and Chart 2: US rates to drive the next phase of
gradual Fed lift-off on rates (%) spread widening in the USDs favour
1.4 Fed funds futures
1.2
1
+75bp
0.8
+50bp
0.6
+25bp
0.4
0.2
0
Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16
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Bank of Japan Governor Bank of Japan (BoJ) Governor Kurodas rhetoric on the JPY last week is critical in
Kuroda denied reports defining the central banks attitude. After a sharp market reaction to comments
that he did not want a about the weak level of the JPYs real exchange rate, he clarified his comments.
weak yen He stated, I didnt say I do not want a weak yen. He added that a weak yen
boosts exports and profits at companies operating overseas, while noting that as
long as exchange rates move stably in a way reflecting economic fundamentals,
they wont do any harm to the economy.
...and is focused on Kuroda is focused on achieving his inflation goal of 2%. While inflation (headline
achieving 2% inflation and core) rose strongly during 2013 and early 2014, its recent sharp retracement is
goal disappointing for the central bank (Chart 1). Yen appreciation is a key contributor
to higher inflation, but the negative effects cannot be ignored; especially the impact
on households and non-manufacturers who suffer as import costs are pushed
higher. It is clear from Kurodas comments that a steady rise in USDJPY as the Fed
starts to normalise monetary policy and yields spreads widen does reflect relative
fundamentals and will be tolerated. A greater danger would be for the JPY to
appreciate again, as this would worsen the already deteriorating inflation situation.
The MoF is in line with Ultimately, it is Japans Ministry of Finance that is responsible for yen policy. On 24
the BoJ March Finance Minister Aso echoed those at the BoJ: It is important for the yen to
move mildlyin a way reflecting economic fundamentals, as sudden rises and falls
are undesirable, he said. The consistency between the two offices is clear,
especially on approving a steady JPY depreciation that reflects the relative
fundamentals.
Chart 1: Weaker JPY needed to boost inflation Chart 2: Fundamentals suggest higher USDJPY
154
144
Model
134 based
projections
124
114
104
94
84
74
01-Jan-1995 01-Jan-2005 01-Jan-2015
CLEER USDJPY
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4
BNP Paribas CLEER In assessing relative fundamentals, one useful tool is our BNP Paribas CLEER
model sees a steady rise model which estimates fair values for currencies over the medium term. Our
in USDJPY CLEER estimate shows a steady rise in USDJPY over this time frame (Chart 2).
The rise is largely due the anticipated divergence in inflation and short-term
interest rates between the US and Japan. It is interesting to note that the foreign
exchange market has been forward looking in its pricing of USDJPY but the
direction is correct. Relative fundamentals suggest the fair value will continue to
trend higher. It is reasonable to assume that markets will continue to be forward
looking and price in these anticipated shifts in a timely manner. The decline in
Japanese real yields (Chart 3) presents a key incentive for domestic investors to
seek greater returns abroad and/or higher yielding domestic assets.
USDJPY diverges from One point of divergence, as highlighted by Governor Kuroda, is the difference
JPY REER between the JPYs REER exchange rate and the nominal level of USDJPY (Chart
4). These two began to deviate from early 2003 and largely reflects the very low
level of inflation in Japan relative to the United States. By comparison, the REER
JPY is now considerably weaker than during the 1990 and 2000 eras, while
USDJPY still trades below its peak from that time by some margin. Indeed, even
our year-end forecast for USDJPY to reach 130 has the pair trading well below its
Q3 1998 peak of 147.66. Furthermore, we forecast a fall in EURJPY by the year
end, given that this cross appears overvalued relative to fundamentals. This
contrasting trend will mitigate the expected decline in the JPYs REER.
We like upside option In light of the policy analysis, we reiterate a preference for upside option structures
structures on USDJPY on USDJPY towards our forecasts. We maintain the following recommendations:
towards our forecasts
6m USDJPY RKO premium rebate: 120 strike KO at 130 (est. 28 Jan
2015).
Additional recommendation:
Chart 3: Falling real yields drive portfolio outflow (%) Chart 4: USDJPY diverges from JPY REER
Source: Macrobond, Bloomberg, BNP Paribas Source: Macrobond, Bloomberg, BNP Paribas
4 BNP Paribas CLEER (CycLical Equilibrium Exchange Rate) provide a fair value for a currency based on the relative economic fundamentals.
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BNP Paribas STEER BNP Paribas STEER has had a profitable run since the start of the year. From 1
has performed well in the Jan 2015 the trading signals published in the Daily STEER update have returned
first half of 2015 25.0%. This performance has been driven largely by EM trading signals which
have returned a total of 17.3% since the start of the year. The G10 signals have
returned 7.7%, with gains in GBPUSD and EURUSD offsetting losses in EURGBP,
AUDUSD and EURNOK (Table 1).
STEER provides a BNP Paribas STEER provides the fair value of an exchange rate based on the
short-term fair value information that is priced into its short-term fundamental drivers such as rates,
based on rates, equities, equities, commodity prices and credit. STEERs trading strategy works by buying
commodities and credit
currencies that are cheap and selling those that are expensive. This strategy
tends to perform best when an exchange rate is pushed away from its STEER by
FX investors trading a theme, driving an over- or undershooting of the exchange
rate. When a currency has deviated from its STEER it typically takes one to two
weeks to revert back towards it.
STEER typically performs Since STEER was initially launched in early 2012 we have noticed that the trading
when overall positioning in strategy tends to perform best when risk-taking in FX markets is high. When
FX markets is high
investors are building positions this can cause an overshooting of an exchange
rate versus its STEER. STEERs strong performance in 2015, however, does not
appear to have been during a period of elevated risk-taking our positioning
analysis shows that overall FX positioning has remained substantially below its
long-term average.
High implied and What other factors can explain STEERs strong performance in a period of
intraday volatility has relatively low market positioning? In our last commentary on STEER performance
benefited STEER in 2015 we noted that STEER had successfully captured the over- and undershooting of
Table 1: Best and worst trades of 2015 Chart 1: STEER performance since Jan 14
Currency Number of Average Average
Returns Hit Ratio
Pair Trades Win Loss
Best performing
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the USD. Delving further into the markets recent characteristics we note that an
increase in both implied volatility and intraday volatility have corresponded with a
strong STEER performance.
STEER performance has Chart 2 shows a simple average of 3m implied volatilities of all the exchange rates
been correlated with the covered by STEER (the major G10 pairs plus 21 EM exchange rates). It is
direction and level of vol noticeable that the period of low and declining volatility in mid-2014 corresponded
with poor performance from the STEER strategy. Meanwhile, the period of
elevated volatility in 2015 has corresponded with a strong performance.
Elevated intraday Similarly, Chart 3 shows the average intra-day volatility of all the exchange rates
volatility may have also covered by STEER, calculated as the days trading range divided by 3m implied
been a benefit to STEER volatility. Intraday volatility has risen substantially since October 2015, with
STEERs profitable run starting one month later in November. The situation was
similar in early 2014 a rise in intra-day volatility corresponded with a strong
performance of the STEER trading strategy.
STEER takes advantage It therefore appears that, although overall risk-taking in FX is low according to our
of choppy FX markets positioning analysis, the elevated implied and intraday volatility of markets means
investors spot market positions are vulnerable to being squeezed on intra-day
moves. STEERs trading strategy benefits from capturing when misalignments
create vulnerabilities for positions to be squeezed and when overshooting occurs
because of sharp intra-day moves.
With volatility still We expect BNP Paribas STEERs trading strategy to continue to benefit from
elevated, STEER should elevated market volatility going forward. Furthermore, the performance of the
continue to perform STEER strategy has tended to be diversified from macroeconomic-based trades or
common FX trading strategies such as momentum and carry.
STEER is available via Daily updates of STEERs trading signals (including target levels and stop-losses)
daily and weekly updates are published in our Daily STEER Update. A weekly STEER update is available in
the FX Quant Insight published on Mondays. For investors who would like to invest
directly in the STEER strategy, a tradeable index is available and published on
Bloomberg (BPCMSTGU Index).
Chart 2: STEER trading strategy appears to have Chart 3: and higher intra-day
benefited from higher FX vol volatility
Total return Average 3m implied vol, % Total return
14 10.0%
35% 35% Intra-day
Implied volatility 12 volatility (daily
9.5%
(rhs) range/3m
implied vol) (rhs)
25% 25%
10 9.0%
15% 15%
8 8.5%
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The NT dollar (TWD) is the best performing currency in Asia in the year to date
and (excluding the RUB) is also the best performer in emerging markets overall.
We thought that this relative outperformance was set to unwind and recommended
shorting the local currency via options (see Buy USD vs. TWD). However, the
domestic news flow has highlighted a new catalyst which we had not considered
earlier. Factoring that in, we now acknowledge that the currency is not an obvious
short and are closing this recommendation.
Specifically, Taiwans life insurance companies have come under pressure from
ratings agencies to hedge the currency risk on their overseas assets. They appear
to be responding to these pressures and are likely to continue to sell USDTWD
forwards and NDFs for a considerable time to ramp up their hedge ratios.
Moreover, their holdings of foreign assets have reached close to regulatory limits,
5
which may slow fresh investment in offshore assets .
Background
This issue dates back to the Lehman crisis, during which Taiwanese life insurance
companies suffered sharp FX translation losses on overseas assets. Chastened by
the experience, they began to hedge their currency risk more assiduously.
Chart 1: Cost of hedging fell as life insurers Chart 2: Taiwanese life insurers overseas assets
1
became less diligent in hedging via FX forwards nearing 45% of total regulatory cap
USDbn Foreign Assets of Lifers (LHS)
USDTWD 12mNDF - 1m NDF (forward points)
300 Foreign Assets as % of total 50%
0.25 regulatory cap
45%
0.00 250
40%
-0.25 35%
200
30%
-0.50
150 25%
-0.75 20%
FSC allows FX volatility
100
reserve fund ... FX fwds grind higher 15%
-1.00
10%
50
-1.25
5%
Post-Lehman, panic hedging
-1.50 by Taiwanese Lifers 0 0%
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Source: Bloomberg, BNP Paribas Source: Bloomberg, BNP Paribas
5
There are several exceptions (especially locally issued foreign currency Bao Dao bonds) that do not count towards the 45% limit. In practice,
this creates plenty of wiggle room around the regulatory limit for taking on higher yielding foreign currency exposures.
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However, since the cost of hedging was eating into their margins, they canvassed
the regulator to allow a FX volatility reserve fund a sort of loss provision for
future currency fluctuations, to be used as a substitute for currency hedging. The
Financial Supervisory Commission relented in March 2012. Subsequently, life
insurers progressively reduced their FX hedge ratios, on the back of which, the
NDF curve relentlessly moved higher (Chart 1).
Earlier this month, one of the life insurance companies reported that the (modest)
strengthening of the NT dollar had depleted its FX volatility reserve fund (up to the
permitted amount). This probably exposed how chronically under-funded these FX
volatility reserve funds were for the industry as a whole. The news sent alarm bells
ringing, with ratings agencies stepping up their warnings about FX exposure and
lack of hedges. The NDF curve has started to crumble recently, probably as other
life insurance companies have started to ramp up their hedge ratios.
Outlook
The main drivers of net portfolio flows are net foreign investment in domestic
equities, and overseas investment by Taiwanese institutional investors. The former
are typically currency unhedged. It is thus easy to see that if the domestic capital
18 June 2015 10
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outflows were to be FX hedged, the capital account would fall well short of
recycling the current account surplus. If the CBC does not mop up the excess
USD, the USDTWD would have to adjust downwards.
We are thus closing our long USDTWD recommendation and reverting to a neutral
stance. We also think there is scope for USDTWD NDF points to fall. The CBC will
continue to limit volatility, but is unlikely to worry unless the spot starts breaking
below 30.5.
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http://www.bloomberg.com/news/articles/2015-06-17/yield-chasing-taiwan-
insurers-face-rating-risk-as-currency-gains
https://tw.news.yahoo.com/%E5%8C%AF%E5%B8%82%E9%9C%87%E7%9B%
AA-
%E5%AF%8C%E9%82%A6%E5%A3%BD%E5%A4%96%E5%8C%AF%E6%BA
%96%E5%82%99%E9%87%91%E7%94%A8%E5%85%89-215008955--
finance.html
3. Taiwan Ratings Corp. warns life insurers facing higher forex risks
http://focustaiwan.tw/news/aeco/201504040010.aspx
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We now recommend going long a call spread at 3.15 and 3.45 (1x2). The
proposed allocation remains unchanged at USD 20mn, forward reference 3.21 and
net premium of -40bp (new minus original trade, or USD 80k); maturity: 1
December 2015. The structure will benefit if USDBRL moves into the 40 to 90
percentile of the error distribution of BNP Paribas forecasts (Chart 1 and Table 1).
The trade is also in line with our short term call on the BRL (it is like a carry trade
at the beginning with delta edging higher as time passes).
(a) To recommend investors position in line with our medium-term view (that the
BRL will fall against the USD despite our more bullish short-term view, reflected in
the recent long trades we proposed), and
(b) To have a position that fits into the balance of risk embedded in the BNP
Paribas longer-term USDBRL forecasts for 2015 and 2016 (Chart 1 and Table 1
below).
In the original trade, we recommended going long a call spread at 3.25 and 3.55
(1x2). The proposed allocation was USD 20mn, forward reference 3.35 and
premium -36bp (USD 72k); maturity: 1 December 2015. The structure was set to
benefit if USDBRL moved into the 60 to 99 percentile of the error distribution of
BNP Paribas forecasts.
Chart 1: BNP Paribas USDBRL fan chart & Table 1: BNP Paribas USDBRL
forecasts
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Why are we proposing this approach? First, because of the errors and uncertainty
in the past data on which our forecasts are based, second, due to uncertainties
regarding the initial condition (lags in data availability or even revisions), third, as
our models are not perfect, and lastly, as the past is not necessarily a good guide
to the future.
Each quarter we will report the deviations in FX moves from our official forecasts.
In addition, we will provide an update on (a) past and new assumptions based on
current and recent developments and their future outlook, (b) the risks to the
existing call (balance of risks) and (c) the degree of asymmetry of the interval
distribution.
All the information will be factored in, such that the main risks to the baseline
scenario are considered in the construction of the distribution of future FX rate
paths. The shape of the distribution will be adjusted over the quarters: events that
have a transitory effect on FX rates could, for instance, be weighted only for the
estimated length of the shock.
Hence the fan chart will represent a probability distribution showing more
information than a simple point forecast (with the width of the fans showing the
overall degree of uncertainty). The fan charts shows all outcomes not just the
central estimate, reflecting the different uncertainties related to the models
forecast.
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FX Vol Focus: Position for USD strength via long USD/short EUR
cross vol structures
Vasilis Koutsaftis EUR-bloc vols are elevated relative to USD-bloc vols.
+1 212 471 7973 A re-pricing of front-end US yields higher should trigger a rally
in USD vols outright and relative to EUR vols.
We fade the richness of EUR vols vs USD vols via long USD
topside with a DKO on EUR crosses.
Currently EUR vols are very expensive relative to USD vols due to outperforming
delivered bund yield vols,and violent position readjustment (table 1).
Currently EURJPY vols trade at the 92nd percentile of richness relative to USDJPY
vols, EURGBP vols trade at the 100th percentile of richness relative to GBPUSD
vols etc (chart 1).
The 18% rise of the USD in trade-weighted terms, has so far been driven almost
exclusively by policy easing outside the US, with very little of the price action being
driven by expectations of US rate hikes. As we approach Fed lift-off and as bund
Chart 1: EUR cross vols-USD cross vols Chart 2: EURAUD spot vs (1.3935, 1.544) barriers
3.0 1.6 EURAUD
EURAUD Lower
2.0
EURAUD Upper
1.55
1.0
0.0 1.5
-1.0
1.45
-2.0
3m EURGBP-GBPUSD Impl Vol 1.4
-3.0 3m EURCAD-USDCAD Impl Vol
-4.0 3m EURMXN-USDMXN Impl Vol 1.35
Aug-11 Aug-12 Aug-13 Aug-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15
Source: Bloomberg, BNP Paribas Source: Bloomberg, BNP Paribas
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yields stabilize and push lower, it is increasingly likely that the USD will return to
the driver seat and USD vols are likely to richen relative to EUR-bloc vols.
Expressing this view via spot-starting vol spreads currently suffers from poor static
vol carry, whereas expressing it in forward-vol space suffers from less impressive
spreads as it does not capture the elevated front-end EUR vols.
We instead prefer to express the view in the form of USD calls with a DKO on EUR
crosses.
We then identify pairs that offer (i) underperforming EUR xvols, (ii) and range-
bound EUR crosses. Table 2 summarizes the results:
EURAUD has traded within the (1.3935, 1.544) range 90% of the time over the last
12 months (chart 2). EURMXN spot has traded within the (16.502, 18.285)
barriers 88% of the time in the last 12 months, while EURJPY spot has traded
within the (132.77, 147.12) barriers 78% of the time in the last 12 months (chart 3).
Finally EURCAD offers a similarly attractive range having traded within the
(1.3183, 1.4607) range 93% of the time in the last 12 months (chart 4).
Chart 3: EURJPY spot vs (132.77, 147.12) barriers Chart 4: EURCAD spot vs (1.3183, 1.4607) barriers
155 1.50
1.48
150
1.46
145 1.44
140 1.42
1.40
135
1.38
130 1.36 EURCAD Curncy
EURJPY EURCAD Upper
1.34
125 EURJPY Lower EURCAD Lower
EURJPY Upper 1.32
120 1.30
Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15
Source: Bloomberg, BNP Paribas Source: Bloomberg, BNP Paribas
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offered @ 0.35%. EURAUD spot has traded within the (1.3935, 1.5440) barriers
90% of the time in the last 12 months. The trade captures roughly 1/2nd of the
premium in the first 3 months in the form of static rolldown. The vanilla is offered
@ 2.87%. The trade sells front-end EURAUD vols which trade 3.1 vols over 2
week delivered vols.
For a more detailed discussion please see BNPP FX Vol Focus, Positioning for
USD strength via long USD strength via long USD/short EUR xvol structures,
June 17, 2015.
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James Hellawell Long USD positioning has started to fall back again. The current
+44 207 595 8485 score of +13 is close to the May low of +10.
Net short NZD positioning remains at an extreme level of -40,
Michael Sneyd suggesting the currency could see a squeeze.
+44 207 595 1307 Net long GBP positioning has increased over the week to +11, its
highest level since November 2014, but still leaves room for GBP
strength.
SHORT LONG
CHF 31
USD 13
GBP 11
SEK 0
CAD -4
AUD -7
NOK -11
EUR -13
18-Jun-2015
JPY -16
-40 11-Jun-2015
NZD
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Chart 2: Net USD Positioning Net long USD positioning has fallen back again and
is approaching its previous low
Long positioning in the USD has started to fall again and
currently stands at +13.
Chart 3: Net NZD Positioning NZD could see a squeeze as net short positioning
remains extreme
Our positioning analysis suggests caution is warranted
on short NZD positions following the recent move.
Chart 4: Net GBP Positioning Net long GBP positioning is at a six-month high,
but room for GBP buying persists
Net GBP positioning has risen to a score of +11. This
follows a recent low ahead of the election of -23.
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FX Snapshot
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Neutral/bearish. In our view, the RUB recovery is too strong, as oil is trading GDP* -2.5% 1.5%
below RUB 3000/bbl and rate cuts are expected to prevent too strong an Current Acc.* 3.5% 4.9%
appreciation. In the longer term, RUB performance will depend on the political
decision to lift sanctions against Russia. We see a risk of a weaker RUB going Policy Rate * 10.00% 7.50%
RUB
forward. USDRUB * 67.39 68.76
Bearish. External financing requirements remain high at around USD 200bn per GDP* 2.2% 4.1%
annum. Flows into FI instruments have stalled and the US Fed is about to tighten
USD liquidity. Turkey is having difficulty financing its external liabilities, and we Current Acc.* -4.3% -4.7%
therefore expect the TRY to continue to weaken against basket. The governments Policy Rate * 9.50% 9.00%
TRY clash with the central bank on interest rates is also undermining Turkeys ability to
USDTRY * 2.85 2.99
meet its inflation targets.
Neutral/bearish. The BoI is waiting to see the impact of currency depreciation on GDP** 3.1% 3.5%
the economy. Commodity prices in USD terms have fallen faster than the ILS has Current Acc.** 1.0% 0.8%
dropped against the USD, so Israel continues to import deflation. Low growth and
low inflation increase the probability that additional action to weaken the ILS will be Policy Rate * N/A N/A
ILS
necessary. USDILS * 3.80 3.80
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Neutral. Although we remain bearish on the BRL due to its weak fundamental
aspects, ie poor economic data (very poor economic outlook, twin deficits around GDP* -2.0% 0.5%
11% of GDP), difficulty in approving fiscal measures and political instability, the Current Acc.* -4.3% -4.4%
USDBRL is likely to outperform on a relative basis after the depreciation seen in
January. We like positioning long the BRL against a basket of the AUD and ZAR, Policy Rate * 14.0% 12.50%
BRL
taking advantage of the short-term retracement and decent positive carry. Locals USDBRL * 3.20 3.40
re-building short positions could benefit from our short-term view as well.
Neutral. A meaningful part of the negative scenario for both rates and growth is GDP* 3.0% 4.5%
already embedded into the price of USDCLP. The technical position is at levels at Current Acc.* -1.9% -2.5%
which the risk reward of being short is not as attractive as it has been in past
quarters, and our growth acceleration model suggests the worst of the economic Policy Rate * 3.00% 4.00%
CLP
slowdown is over. USDCLP * 640 650
Bullish. We remain bullish on the MXN as the currency should benefit from growth
outperformance in the US. Furthermore, Mexican terms of trade have suffered the
GDP* 2.7% 3.4%
least in the region, whereas the currency has tended to move in tandem with its
peers. The Foreign Exchange Commission has two intervention mechanisms in Current Acc.* -2.0% -2.3%
place: 1) daily auctions with minimum price (1.5% weaker than previous fixing) and Policy Rate * 3.50% 4.00%
MXN USD 200mn daily maximum amount and 2) daily auctions of USD 52mn without
minimum price until 29 September. We still like being long the MXN against the USDMXN * 15.20 15.20
JPY/EUR/AUD.
Neutral. The peso has appreciated on the back of an increase in oil prices and GDP* 3.50% 4.10%
USDCOP has now recovered from the exaggerated depreciation reason why we Current Acc.* -5.7% -4.2%
hold a neutral stance. However, this does not change our medium-term/long-term
view that a deteriorated terms of trade in Colombia, combined with secular USD Policy Rate * 4.50% 5.00%
COP
strength are likely to pressure the Colombian peso to grind weaker in the long term. USDCOP * 2650 2750
Neutral. The central bank (BCRP) has been visible in USD offerings in the spot
market, currency swaps (similar derivative instrument in Brazil) and CDRs (USD- GDP* 4.1% 4.7%
linked bills). The intervention intended to provide hedge for markets while trying Current Acc.* -3.9% -4.5%
to reduce the economys dollarisation has reduced moderately, as banks have
been meeting the de-dollarisation targets. Economic activity shows signs of Policy Rate * 3.75% 4.00%
PEN
recovery, but neither inflation nor the Fed hikes will pressure the BCRP to hike USDPEN * 3.22 3.25
rates this year.
Bearish. The government unified SICAD I and II into just one SICAD rate, starting
at 12.00. Additionally, it launched the SIMADI rate the legalisation of the black
market but still subject to government intervention. Data from the Banco Central de GDP* -7.0% 0.5%
Venezuela, however, shows that 97% of transactions are still conducted under the Current Acc.* -2.0% 3.0%
regulated systems. Meanwhile, parallel FX rates continue to reach all-time high
levels amid increasing disbelief in local FX system. We remain cautious and still Policy Rate * 14.5% 14.5%
VEF
believe the new measure does not change the macroeconomic deterioration of the USDVEF * 35.00 42.00
Venezuelan economy. In our view, USD supply will not be sufficient to meet the
high demand.
Bearish. We are entering into the terminal stage of a situation in which the
cumulative effects of currency overvaluation plus monetary and fiscal disruptions of
the last seven years are no longer sustainable. Not to mention the systematic GDP* -1.0% 1.0%
strong USD across the globe and the acceleration of the BRL depreciation. Current Acc.* -1.5% -1.0%
However, the upcoming presidential elections in October will prevent a decline in
international reserves and keep the peso stable, possibly at the expense of Policy Rate * 25.0% 35.0%
ARS
domestic activity. We expect further delays in import payments, a new hard USDARS * 12.00 14.25
currency swap with China and mounting pressure to force local firms to sell FX.
Once elections are over, an unavoidable adjustment is our most plausible scenario.
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Neutral. We are neutral on the RMB. Ahead of the SDR review in October, we Current Acc.* 2.6% 2.7%
think the PBoC will engineer stability in the RMB. Policy Rate * 2.25% 2.25%
CNY
USDCNY * 6.20 6.16
GDP* 3.6% 3.4%
Neutral. The strength in the TWD appears out of line with regional peers but the
increase in life insurers hedging suggests that scope for the TWD to depreciate is Current Acc.* 13.7% 10.6%
limited. USDTWD NDF points could also head downwards. We close our Policy Rate * 1.75% 1.75%
TWD recommendation to buy USDTWD via 3m USD calls.
USDTWD * 32.00 32.50
GDP* 2.70% 2.90%
Neutral. We believe USDKRW is going to trade in a holding pattern. Room for Current Acc.* 8.6% 7.1%
appreciation continues to be limited by the BoK but a strong current account and
positive real interest rates limit the scope for a sell-off. Policy Rate * 1.50% 1.50%
KRW
USDKRW * 1140 1160
GDP* 7.1% 7.5%
Bullish. With offshore positioning now much reduced and INR offering the best Current Acc.* -0.9% 0.1%
carry-to-vol ratio in emerging markets we like owning the INR; stay long the INR
versus the SGD. Policy Rate * 7.00% 7.00%
INR
USDINR * 65.00 66.50
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HIGH-INCOME ECONOMIES
GMT Local Previous Forecast Consensus
Fri 19/06 Spain Moody's ratings review
03:00 12:00 Japan BoJ rate announcement
07:00 09:00 Eurozone EU finance ministers hold meeting with non-euro finance chiefs
07:00 09:00 Ecofin in Luxembourg
08:00 10:00 Current account (sa): Apr EUR 18.6bn EUR 21.0bn -
12:30 08:30 Canada CPI (nsa) m/m: May -0.1% 0.5% -
12:30 08:30 CPI y/y: May 0.8% 0.8% -
12:30 08:30 CPI index: May 126.2 126.8 -
12:30 08:30 BoC core CPI m/m: May 0.1% 0.3% -
12:30 08:30 BoC core CPI y/y: May 2.3% 2.1% -
15:40 08:40 US San Francisco Feds Williams speaks on monetary policy in San Francisco, CA
16:00 12:00 Cleveland Fed's Mester speaks at Fed policy summit in Pittsburgh, PA
Tue 23/06 06:45 08:45 France Industry survey: Jun 103 103 -
08:00 10:00 Eurozone PMI manufacturing (flash): Jun 52.2 52.4 52.0
08:00 10:00 PMI services (flash): Jun 53.8 53.5 53.7
08:00 10:00 PMI composite (flash): Jun 53.6 53.3 53.7
10:00 11:00 UK CBI monthly industrial trends: Jun -5 - 3
12:00 08:00 US Fed Governor Powell speaks on monetary policy in Washington, DC
12:30 08:30 Durable goods orders m/m: May -1.0% (r) -0.7% -0.5%
12:30 08:30 Durable goods ex-transport m/m: May -0.2% (r) 0.4% 0.8%
12:30 08:30 Core capital goods shipments m/m: May 0.5% (r) 0.8% -
13:45 09:45 Markit US PMI (prel): Jun 54.0 54.0 54.2
14:00 10:00 New home sales: May 517k 520k 514k
Thu 25/06 06:00 08:00 Germany GfK consumer confidence: Jul 10.2 10.2 10.1
06:15 08:15 Eurozone ECB speakers at 2015 IIF Europe summit in Frankfurt
07:00 09:00 ECB's Nouy speaks at European parliament in Brussels
08:00 09:00 ECB's Costa attends meeting of central banks in Portugal
14:00 16:00 EU leaders start two-day summit in Brussels
10:00 11:00 UK CBI reported sales: Jun 51 - -
12:30 08:30 US Personal income m/m: May 0.4% 0.5% 0.5%
12:30 08:30 Personal spending m/m: May 0.0% 0.8% 0.7%
12:30 08:30 Initial claims 267k 270k -
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HIGH-INCOME ECONOMIES
GMT Local Previous Forecast Consensus
Fri 26/06 23:30 08:30 Japan Core CPI national y/y: May 0.3% 0.1% 0.0%
23:30 08:30 Core CPI Tokyo y/y: Jun 0.2% 0.2% 0.2%
23:30 08:30 Household consumption y/y: May -1.3% 4.2% 3.6%
23:30 08:30 Unemployment rate (sa): May 3.3% 3.3% 3.4%
(25/06)
Germany Moody's ratings review
France S&P ratings review
06:45 08:45 Consumer confidence: Jun 93 94 -
Belgium Moody's ratings review
07:30 09:30 Eurozone Eurocoin: Jun 0.38 0.32 -
08:00 10:00 M3 y/y: May 5.3% 5.6% 5.4%
08:00 10:00 M3 3m y/y: May 4.7% 5.2% 5.1%
08:00 10:00 EU leaders conclude summit in Brussels
08:00 10:00 Italy ISAE business confidence: Jun 103.5 103.2 -
08:00 10:00 ISAE consumer confidence: Jun 105.7 105.2 -
14:00 10:00 US Michigan sentiment (final): Jun 94.6 (p) 94.6 94.6
16:45 11:45 Kansas City Fed's George speaks on the payments system in Kansas City, MO
Release dates and forecasts as of close of business prior to the date of publication; see Daily Macro Monitor for any revisions; (p) = preliminary; (r) = revised
Source: BNP Paribas, Reuters, Bloomberg, national statistics, central banks, ratings agencies
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ASIA
GMT Local Previous Forecast Consensus
Fri 19/06 04:00 12:00 Malaysia CPI y/y: May 1.8% 1.9% 2.1%
Tue 23/06 01:45 09:45 China HSBC PMI manufacturing (flash): Jun 49.2 49.5 49.4
05:00 13:00 Singapore CPI y/y: May -0.5% -0.2% -0.2%
Fri 26/06 05:00 13:00 Singapore Industrial production y/y: May -8.7% -4.0% -
During 25-30/06 Vietnam Trade balance: Jun USD -900mn USD 200mn -
week 25-30/06 GDP (YTD) y/y: Q2 6.0% 5.8% -
Release dates and forecasts as of close of business prior to the date of publication; (p) = preliminary; (r) = revised
Source: BNP Paribas, Reuters, Bloomberg, national statistics, central banks, ratings agencies
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CEEMEA
GMT Local Previous Forecast Consensus
Fri 19/06 Czech Rep. Moodys ratings review
Tue 23/06 08:00 10:00 South Africa Current account (% GDP): Q1 -5.1% -4.5% -5.1%
11:00 14:00 Turkey CBRT one-week repo rate 7.50% 7.50% -
11:00 14:00 CBRT overnight borrowing rate 7.25% 7.25% -
11:00 14:00 CBRT o/n lending rate to primary dealers 10.25% 10.25% -
11:00 14:00 CBRT overnight lending rate 10.75% 10.75% -
12:00 14:00 Hungary NBH meeting and rate decision 1.65% 1.50% 1.50%
Wed 24/06 08:00 10:00 Poland Unemployment rate: May 11.2% 10.6% 10.8%
Thu 25/06 09:30 11:30 South Africa PPI y/y: May 3.0% 3.2% -
11:00 13:00 Czech Rep. CNB meeting and rate decision 0.05% 0.05% 0.05%
Fri 26/06 07:00 09:00 Hungary Unemployment rate: May 7.6% 7.6% 7.5%
Release dates and forecasts as of close of business prior to the date of publication; (p) = preliminary; (r) = revised
Source: BNP Paribas, national statistics, ratings agencies, central banks, Bloomberg, Reuters
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LATIN AMERICA
GMT Local Previous Forecast Consensus
Fri 19/06 12:00 09:00 Brazil IBGE inflation IPCA-15 m/m: Jun 0.60% 0.85% 0.85%
13:00 08:00 Mexico Aggregate supply and demand: Q1 4.0% - 2.9%
Mon 22/06 14:00 08:00 Mexico Retail sales y/y: Apr 5.5% 5.2% -
Tue 23/06 19:00 16:00 Argentina Trade balance: May USD 0.3bn USD 0.3bn -
During 18-22/06 Brazil Tax collections: May BRL 109.2bn - BRL 94.0bn
week 24-25/06 Long-term rate TJLP 6.00% 6.50% -
Release dates and forecasts as of close of business prior to the date of publication: See Daily Latam Spotlight for any revision
Source: BNP Paribas, Reuters, Bloomberg, national statistics, central banks, ratings agencies
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FX Forecasts*
USD Bloc Spot Q2 '15 Q3 '15 Q4 '15 Q1 '16 Q2 '16 Q3 '16 Q4 '16
EURUSD 1.14 1.09 1.04 1.02 1.00 1.00 1.02 1.04
USDJPY 123 124 127 130 132 132 134 136
USDCHF 0.92 0.97 1.04 1.08 1.10 1.10 1.08 1.06
GBPUSD 1.59 1.51 1.51 1.50 1.47 1.45 1.48 1.49
USDCAD 1.22 1.25 1.28 1.26 1.24 1.22 1.20 1.18
AUDUSD 0.78 0.76 0.74 0.74 0.73 0.73 0.75 0.75
NZDUSD 0.69 0.69 0.69 0.69 0.68 0.68 0.71 0.71
USDSEK 8.11 8.53 8.94 8.92 8.80 8.60 8.43 8.27
USDNOK 7.76 8.07 8.46 8.43 8.60 8.50 8.24 7.98
EUR Bloc Spot Q2 '15 Q3 '15 Q4 '15 Q1 '16 Q2 '16 Q3 '16 Q4 '16
EURJPY 140 135 132 133 132 132 137 141
EURGBP 0.72 0.72 0.69 0.68 0.68 0.69 0.69 0.70
EURCHF 1.05 1.06 1.08 1.10 1.10 1.10 1.10 1.10
EURSEK 9.25 9.30 9.30 9.10 8.80 8.60 8.60 8.60
EURNOK 8.85 8.80 8.80 8.60 8.60 8.50 8.40 8.30
EURDKK 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46
Asia Bloc Spot Q2 '15 Q3 '15 Q4 '15 Q1 '16 Q2 '16 Q3 '16 Q4 '16
USDSGD 1.33 1.36 1.38 1.40 1.40 1.41 1.42 1.42
USDMYR 3.71 3.72 3.75 3.80 3.80 3.80 3.85 3.85
USDIDR 13307 13300 13500 13800 14000 14000 14000 14000
USDTHB 33.6 33.60 33.70 33.80 33.80 33.80 34.00 34.00
USDPHP 44.9 45.20 45.50 46.00 46.00 46.50 46.50 47.00
USDHKD 7.75 7.80 7.80 7.80 7.80 7.80 7.80 7.80
USDRMB 6.21 6.20 6.18 6.20 6.25 6.22 6.18 6.16
USDTWD 30.7 31.50 31.70 32.00 32.00 32.10 32.30 32.50
USDKRW 1107 1130 1140 1140 1150 1155 1155 1160
USDINR 63.7 64.00 64.50 65.00 65.00 65.50 66.00 66.50
USDVND 21810 21800 21900 22000 22000 22100 22200 22200
LATAM Bloc Spot Q2 '15 Q3 '15 Q4 '15 Q1 '16 Q2 '16 Q3 '16 Q4 '16
USDARS 9.07 9.60 10.00 12.00 13.75 14.00 14.25 14.25
USDBRL 3.04 3.08 3.10 3.20 3.25 3.28 3.30 3.40
USDCLP 626.88 635 630 640 635 635 640 650
USDMXN 15.27 15.25 15.20 15.20 15.20 15.20 15.20 15.20
USDCOP 2530 2550 2600 2650 2620 2700 2700 2750
USDVEF 6.29 13.80 25.60 35.00 35.00 35.00 35.00 42.00
USDPEN 3.16 3.16 3.18 3.22 3.25 3.25 3.25 3.25
*End Quarter
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Michael Sneyd FX Strategist & Lead Quant Strategist London 44 20 7595 1307 michael.sneyd@uk.bnpparibas.com
Daniel Katzive Head of FX Strategy North America New York 1 212 841 2408 daniel.katzive@us.bnpparibas.com
Vasilis Koutsaftis FX Options Strategist New York 1 212 471 7973 vasilis.koutsaftis@americas.bnpparibas.com
Erkin Isik FX & IR CEEMEA Strategist Istanbul 90 216 635 2987 erkin.isik@teb.com.tr
Mirza Baig Head of FX & IR Asia Strategy Singapore 65 6210 3262 mirza.s.baig@asia.bnpparibas.com
Gabriel Gersztein Head FX & IR Latam Strategy Sao Paulo 55 11 3841 3421 gabriel.gersztein@br.bnpparibas.com
Samuel Castro FX & IR Latam Strategist Sao Paulo 55 11 3841 3492 samuel.castro@br.bnpparibas.com
Gustavo Mendonca FX & IR Latam Strategist Sao Paulo 55 11 3841 3445 gustavo.mendonca@br.bnpparibas.com
Barbara Consuelo, Foreign Exchange, London. Tel: 44 20 7595 8486, Email: Barbara.Consuelo@uk.bnpparibas.com
RESEARCH DISCLAIMERS Important Disclosures: Please see important disclosures in the text of this report.
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BNP Paribas (2015). All rights reserved.
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