A few FX Notes for the Week

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A few FX Notes for the Week

• On risk appetite: The recent move back to risk should meet some resistance in the short term. Current levels, ie S&P 500 close to earlier post-Lehman highs now at 1138 vs high at 1150 from Jan 19 and VIX at close to 17%. Fridays US NFP seems to have inspired investors to believe that US labor market is showing underlying strength, ie with cold weather effects out of the way US NFP could show some real strong numbers in March (bearish EUR/USD on relative growth/rates in the run up to March NFP). Upcoming Chinese data tomorrow is expected to show imports continuing to stay strong although dropping back to approx 40 % y/y (85 y/y in Jan), see chart in attached PDF. Todays NIFB small business optimism probably need to take a step up from last month 89,3 to be consistent with large US companies pulling small companies in the recovery and keeping current S&P 500 momentum

• The call for a self sustainable recovery is however still out there and the real tough test for to stock markets will not come now but later in year when exiting strategies and ultra cheap liquidity will start to be removed and the restocking is behind us. For now capital flows will probably continue to flow to emerging markets and AUD etc, weighing on the dollar from time to time. The main US and European indices should though have tougher time to climb in the very short term. Nnext step up when we receive some March macro data that doesn’t include cold whether? Stock markets and risk appetite should thus be rather neutral for Scandies in the short term, see further below.

• EUR/crosses except EUR/GBP should in my view stay rather offered despite Greece we able to place 5 bn refunding last week (not any sign of strength given current yield levels and the implicit assurances from France/Germany). 20 bn EUR more is to be refunded in spring. An EMF solution will not come about easy as a new treaty need to be negotiated and who would think Euro zone members should be able to agree on the part concerning sanctions/penalties for countries that show fiscal imprudence? The only way the euro area can get some relief from the upcoming austerity packages is through ECB staying on hold and the Euro will continue to weaken. We continue to look for EUR/USD move toward 1,32 in 1 month, through our 1 m down side butterfly despite the extensive amount of EUR shorts, see PDF file.

• Sterling will continue to have a rocky road ahead of elections as an unclear outcome is in the cards and uncertainty remains of how fast spending cuts and income strengthening measures will be implemented (and what trade off that will mean for UK rates). The rather weak impact on UK net exports from the weak GBP also poses questions (see not at least todays numbers). Still, we would argue there could be good risk reward moving in to a long GBP vs basket of currencies before the election as there should be some uncertainty removed and reestablishment of fiscal credibility after the election has taken place. Bear in mind GBP is 25 % weaker compared to pre- subprime levels which seem somewhat overdone in 6 to 12 month perspective. We will return to this issue later on.

• On Scandies. It is obvious that SEK and NOK has become the favorite trade of the year so far. We can’t disagree with the fact that debt investors find Swedish and Norwegian government paper attractive store of value and diversifying vehicle compared to euro sovereigns (including a positive FX effect for those FI investors who dare to take part in FX). Swedish forward looking data have been strong and the Riksbank has played down the weak Q4 numbers implying that Gov Ingves now is now no longer in a crisis mode and wants to cautiously exit the extreme policy, starting with hiking 25 bp in July.

• Swedish CPIF later this week could surprise on the upside. We look for 2,7 y/y v consensus of 2,5 y/y (Riksbank has 2,6). However the main reason behind this should be the significant price increases on electricity and we will see the CPIF drop going forward. Prospera survey will due tomorrow will show market now expect SEK to strengthen (adaptive expectation) implying what we already know, ie short EUR/SEK is a crowded trade. For the week wee look for EUR/SEK in a narrow range 9.68- 9.80.

• As well known the big risk in SEK lays in a stock market correction. AP funds yearly reports gave as expected a clear evidence that the influence on SEK from potential rebalancing flows could be severe given huge hedges that are rolled over on a continuous basis. Still, our best guess is that the most imortant indices (US MSCI and EU MSCI) will move rather sideways in the short term. All in all this proposes that we continue to trade EUR/SEK sideways with implied vol continue slightly lower. We are short EUR/SEK via option strategy, see PDF above for current trade recommendatons. Our target in EUR/SEK is 9.75-9.50 in a 3 to 6 m perspective (as we are hesistant that SEK should move back to pre-crisis levels in a fast mode, see for instance discussion from Riksbank that neutral rate should be lower now than before)

• At last, we have not changed our view on 3 to 6 m USD/JPY upside potential. That said yen will stay bid in the run up to Japanese fiscal year end March 31

(repatriation?) and in the wake of some speculation of a rather soon RMNB appreciation. Sooner or later though relative interest rate curve steepness will push USD/JPY higher. We target a 95-98 USD/JPY in 3 to 6m.

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Upside risks to US Small Business Confidence as

Service PMI improved in February

(Prev. 89.3)

US Small Business Confidence (NFIB) & Service PMI

35

40

45

50

80

85

90

95

100

105

110

PMI

NFIB

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China imports continue to keep asian markets and risk

appetite rather strong

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(Thu) CPI February – electricity prices push up again

CPI –

(Swb: 0.5/1.2 / Market: 0.5/1.1 / Riksbank: - /1.3 / Prev: -0.6/0.6)

CPIF –

(Swb: 0.6/2.7 / Market: 0.4/2.5 / Riksbank: - /2.4 / Prev: -0.3/2.6)

Sub Groups

Risks

Feb 2010

(Forecast) Jan 2010

Feb 2010 (Forecast)

+/-01 Food and non-alcoholic beverages

0.0

0.2

0.1

-02 Alcoholic beverages and Tobacco

0.0

0.1

03 Clothing and footwear

0.1

0.3

+

04 Housing etc.

0.3

-1.3

-0.5

- Electricity 0.3 0.1 0.4

- Rent 0.0 0.3 0.3

- Mortgage interest costs 0.0 -2.0 -1.6

05 Furnishing

0.0

06 Health

0.0

0.1

07 Transport

0.0

1.0

0.8

- Fuels and lubricants 0.0 0.7 0.5

08 Communications

0.0

-0.1

09 Recreation and culture

0.1

0.0

-0.1

10 Education

0.0

11 Restaurants and hotels

0.0

0.2

12 Misc. goods and services

0.0

0.2

0.1

CPI

0.5

0.6

1.2

CPIF

0.6

2.6

2.7

CPIX

0.6

2.6

M/M

Y/Y

•

Significant price hikes on electricity

(+0.3 p.p.) combined with

seasonally normal price increases

on clothing & footwear (+0.1 p.p.)

and package holidays (+0.1 p.p.)

push up the Swedish inflation rate

in February

•

Nevertheless, looking ahead we will

see the annual CPIF rate decrease.

This is mainly due to decreasing

contribution to the annual CPI-rate

from the fuel component (from 0.7

p.p. -> negative until summer)

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Trade Ideas year to date

trade date ref nr strategy spot ref

expiry or projected time to

reach target

Trade specifics cost in

pips* exit date return**

05-Jan-10 1 USD/JPY call spread 1 by 1.5 91.90 6m buy 1*** USD call /JPY put @ 95, sell 1.5 USD call/JPY put @ 105 175 19-Jan-10 2 EUR put/SEK call RKO @ 9.65 10.13 89 days buy EUR put / SEK call strike @ 10.05 RKO @ 9.65 440 19-Jan-10 2 short EUR/SEK spot 10.13 3m sell 0.5 EUR/SEK spot @ 10.1250 , s/l @ 10.37, S/L trailed to 10,05 on feb 18

26-Jan-10 1 ref 1 converted to USD call /JPY put 89.75 buy 1.5 sold USD call /JPY put strike 105, cost 20 pips 195

28-Jan-10 3 short GBP/NOK 1 to 3 m sell 0.5 GBP/NOK spot @ 9,49, s/l @ 9,65 18-Feb-10 1.3%

26-Feb-10 4 EUR/USD downside butterfly 1.36 1m buy 1 @ 1,35 EUR put /USD call, sell 2 @ 1.32 EUR put /USD call, buy 1 EUR put/USD call @ 1.28 40

* net cost in price currency **return in % or return in pips *** notionals in units

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Research - Macro, FI & FX

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