120424 Range-bound trading in the currency markets could be ending

"Looking back over the last 12 years, there have only been five episodes where a lack of trend across all 42 G-10 crosses has persisted for more than the current period,"

So how do you play this potential shift?

The strategists are bearish on the euro, [EUR=X 1.3196 0.0042 (+0.32%) ] dollar, [.DXY 79.18 -0.19 (-0.25%) ] and the yen, [JPY=X 81.13 -0.03 (-0.04%) ] expecting their year-to-date underperformance to continue. So they suggest selling those against other currencies, like the British pound, [GBP=X 1.6131 0.0007 (+0.04%) ] Canadian dollar, [CAD=X 0.9885 -0.0021 (-0.21%) ] and Swedish krona. [SEK=X 6.7417 -0.0073 (-0.11%) ] In emerging markets, they like the Mexican peso, [MXN=X 13.1579 -0.0128 (-0.1%) ] South Korean won, [KRW=X 1137.15 -4.35 (-0.38%) ] and South African rand. [ZAR=X 7.79 -0.0473 (-0.6%) ]

That means:

• Short EUR, USD, YEN
• Long GBP, CAD, SEK
  

120423 Base Case Review

Indicators supported our base case:
* Spanish bond auctions auction on Thursday was well supported.
* Bank of Canada begins to sound bullish.
* IMF upgrades global growth expectation.
* Bundesbank says German economy is in good shape.
* some bullishness out of the UK.

Strong US data May - July may change things enough to keep USD from weakening on the election season turmoil.

It is our view that it is essentially short term speculation and noise flow that is pressuring EURO currently.
It is also our view that commentators are too positive in spinning US data and too negative in spinning China and other data.
Since the real bigger drivers are solid in neutral mode, the shorter term drivers will dominate.

Bottom line: Will the Fed cause an imminent material change in the direction of EURUSD in favour of the USD?

120419 Base Case

#1.  Our base case is that "fear" noise levels mask a more bullish (relative to the expected outcome of "fear noise levels" for risk in general and anti-dollars in particular).

Potential crises:

• #1.1  EU sovereign debt --> Spain --> EURO to ZERO (taking anti dollars along on the ride down)
• #1.2  China economic slowdown --> hard landing --> AUD to ZERO (taking anti dollars along on the ride down)
• #1.3  Global economic slowdown --> crisis for EU --> EURO to ZERO (taking anti dollars along on the ride down)

#2. The other aspect of our base case is that instead of a "fear driven" USD rally we can expect a USD rally in response to "positive economic growth indicators from the US".

• #2.1  The big question is:  Will the US economy beat the Fed in terms of its sustainable out performance and return to a real normal growth speed sooner than what the Fed said ("2014, maybe").  (In order to return to the normal ('good') growth speed it will have to over shoot on the upside.  The whole point then is that short term data that overshoots will in typical "dumb down" market style be extrapolated to mean, this is a trend and they will run away with this idea.)
• #2.2  We think the process will be as follows:
• Convincing data --> USD UP --> Indications no further QE --> USD UP --> Interest rate hike expectations UP --> USD UP followed by the actual happening of these expectations (sustained good data --> definitely not further QE --> actual tightening of interest rate conditions (this will lead hikes with a few months).