FX Markets Weekly [JP Morgan]

• FX Outlook: Policy remains too murky – stay long USD
In markets which have become almost entirely policy-driven, this
week’s developments have injected more doubt than confidence. Europe
needs a liquidity fund with conditionality, but EcoFin is unlikely to
deliver one next week. China’s tightening despite weak CPI suggests
that housing remains an unresolved issue. Positions have moved quickly
from short USD to small long, but the policy environment is too murky
to reverse dollar strength. Stay long vs commodity FX and Europe, but
neutral vs JPY.

• FX Derivatives
During the past month, European and JPY cross vols have rallied, while
USD/JPY implieds have declined. Continue to sell longer-dated
USD/JPY vol. AUD/JPY vol curves are at historically steep levels: buy
longer-dated AUD/USD rather than AUD/JPY vol. NZD/USD implied
vol appears as a good buy among shorter-dated tenors, both outright and
on a relative basis versus USD/NOK vol.

• Trade Recommendations
Keep a moderately anti-cyclical portfolio: risks persist but news flow is
random. Stay long USD vs AUD, NZD, NOK (all cash) and SEK (cash
and options). Stay short AUD/CAD (cash). Stay short GBP vs EUR
(cash) and CHF (cash and options), as the sovereign risk spotlight rotates
around the G-4. Stay short EUR vs PLN and SEK, and long NOK vs
NZD. Keep CAD/JPY as a long-term valuation trade.

• Technical Strategy
Despite the hold of key levels, European currencies remain vulnerable to
new lows amid the broader deleveraging process. EUR/USD targets 1.31
and GBP/USD seeks the 1.53 area. The commodity currencies staged a
short term bullish shift over the past week led by AUD and CAD while
suggesting additional outperformance on the crosses. Latam FX finally
shifts into a consolidation phase following the test of critical resistance
levels for USD/BRL and USD/CLP. Stay short EUR/USD, GBP/USD,
NZD/NOK and EUR/MXN. Use corrective retracements in AUD and
CAD to establish long positions on the crosses.

• FX Alpha Strategies

Rate momentum strategies (forward carry) remain long USD across the
board. The strategy is down 0.5% on the week but up 1% YTD.

FULL REPORT HERE