FxWirePro: Binary Outcomes That FX Market Needs To Consider in 2020 and Tactical Trades

The year-2019 was not only the time in which we began to establish ourselves in a permanent low-interest world. 2019 was also a year of exceptionally low exchange rate volatility. 2020 is one year where we know that the probability of the baseline forecast being realized is unusually narrow, given its dependence on a number of uncertain binary outcomes, starting with:

1) US-China truce vs re- escalation and 

2) An orderly vs still messy Brexit, but which also include

3) A progressive vs moderate Democrat alternative to Trump in 2020 and, to a lesser extent

4) Whether President Trump survives the impeachment hearings. 

What is more certain is that the global economy is late-cycle, global monetary policy is facing efficacy constraints, and the likelihood of resolving all the aforementioned uncertainties in a confidence-restoring, growth-positive way is ultimately quite low.

Tactically, with limited visibility on major questions which will dictate macro trends over the next four quarters, the list of top trades are shorter than usual, and focused on themes most likely to play out early in the year. These include owning optionality on European relation through upside in EURUSD and CHFJPY and fading the rally in EURNOK. 

We buy 3M3M USDCHF vol on US Democratic primary drama in 1H, and hedge pro-growth trades through downside AUDCHF, funded by short AUDNZD. 

In EM FX, analysts suggest starting the year with a small EM FX overweight overall, expressed via OW Latam FX and in outright trades in short USDMXN and long PENCLP. 

Elsewhere relative value trades include OW RUB, CZK, and ILS vs UW HUF and RON in EMEA EM, and OW MYR vs PHP, and long TWDKRW outright in Asia FX. Courtesy: JPM