Top 10 FX Trades
Large household balance sheets and poor asset quality suggest G10 currencies except EUR, JPY and USD will come under selling pressure. Moderate Fed rate hikes may not threaten the currencies of EM economies with strong balance
sheets and high real yields, but may unleash deleveraging pressures on economies which we call ‘FX canaries’. JPY and EUR have upside potential as policy normalization comes closer. Both currencies are internationally underowned.
USD may stay directionless for most of 2018 before heading lower for years to come.
1) Long USD/CAD
Widening interest rate differentials and debt worries in Canada.
2) Long EUR/NOK
Evolving away from selling oil to the world, and moderating housing market.
3) Short CHF/JPY
An accommodative SNB and widening inflation differentials with Japan.
4) Short USD/JPY
BoJ shifting its yield curve control and Japanese repatriation.
5) Long EUR vs. AUD, NZD basket
High leverage and weakening housing markets vs. strong growth in EMU.
6) Long CLP/MXN
Mexican election and NAFTA uncertainty are likely to weigh on MXN.
7) Long PLN/HUF
Monetary policy divergence plus growth dynamics suggest PLN outperformance.
8) Short USD/MYR
Pick-up in growth, cheap valuations, higher oil prices and policy normalization.
9) Short AUD vs. KRW, TWD basket
Policy divergence and strong exports helping TWD and KRW.
10) Long IDR/PHP
IDR valuation and carry is attractive. PHP stays weak, given its twin deficit.