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FxWirePro: Snippets of Relative Values Among Scandinavian FX-Bloc
Long Scandi FX on RV; Rotate long NOK vs GBP, CAD basket into long NOK and SEK vs CAD Scandi FX, particularly NOK, remain our procyclical currencies of choice within G10 given cheap valuations, central banks that are resisting negative rates and strong external and fiscal balances. Longs in Scandi FX trades are initiated in late May but had cut SEK shorts in June given the unexpected spike in infection rates. This spike has now come off its peak and now we also have data that shows that mortality had not risen with the risk in infections (refer 1st chart). The latest developments make us more comfortable to re-initiate SEK longs. Meanwhile the narrative around NOK remains unchanged. We stay long but take profits on exposure vs. GBP which is predominantly motivated by wanting to take partial profits on our broad range of GBP shorts. NOK and SEK longs are not without risks given the ongoing fragility in the recovery, and hence these longs are expressed as relative value trades vs CAD. The expression also gives the portfolio exposure to long EURUSD in a lower beta format.
CAD meanwhile remains a notable underperformer thus far in July. We have argued that CAD should remain under-pressure this summer, given that the drag from oil is still considerable and could continue to aggravate net trade (refer 2nd chart), as could disruptions in supply chains deferring imports into Canada. This will keep pressure on CAD's precarious BoP dynamics and current account deficit, which historically has had outsized reliance on portfolio inflows. A persistent external deficit and financing requirement presents challenges for CAD and indeed other current account deficit countries as a risk premium could be necessary in order to attract those inflows in the absence of higher rates.
Sell CAD/SEK at 6.663. Stop at 6.810 levels.
Sell CAD/NOK at 6.838. Stop at 7.010 levels. Courtesy: JPM