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The global economy is surfing a cyclical upturn, and financial markets have been gorging on central bank accommodation, but as post-crisis policies are dismantled, the appearance of calm in FX-land risks being deceptive.
A Fed rate hike next week, on the other hand, is almost entirely priced in and is therefore unlikely to have a significant effect on USD.
With commodity prices looking soggy, the dollar is big across the board this morning, albeit quietly.
Poor trade data didn’t help the AUD, but NZD has done worse, giving reversing much of yesterday’s gains. A neutral BOC has taken the wind of CAD’s sails and Irish border talks look like dragging, anchoring GBP.
We see further 10% downside for the dollar from here. EUR strength should support the NOK and SEK, while global growth should support the AUD and CAD.
We’ll stick with short GBPNOK, long AUDNZD, and short USDCAD on a day with minimal news or data, and wait for tomorrow’s labor market data.
The triangles between Loonie–Sterling–Aussie to weaken elevated CAD-correlations: It is noted that umpteen numbers of times over the previous few weeks that CAD-denominated implied correlations are high, and they continue to stay elevated even as recently realized corrs have begun to cool.
Positive inflation data created optimism amongst CAD investors on Friday, fueling hopes that inflation might return to the center of the BoC’s target corridor.
It is effectively monetized this displacement over the past few weeks by shorting GBPCAD vs AUDCAD correlations via triangles of vanilla options comprising of short GBP calls/CAD puts, short AUD puts/CAD calls and long GBP calls/AUD puts with carefully chosen strikes and notionals on the cross leg (GBPAUD).
GBPCAD and AUDCAD spot are -1.7% and +1.7% since our publication (so both short legs have drifted out of the money) and trailing day-on-day realized correlation has dropped 20% pts., yet implied corrs are virtually unmoved, which is as much a sign of the relative obscurity of the CAD-cross option market as investor focus on weightier macro issues.
The commodity prices with oil and base metals higher across the board, giving commodity currencies a lift as well, despite narrower yield spreads (refer above chart). Against this backdrop, the portfolio has fared well in the past week.
In G10, longs in Europe (EUR, NOK) vs USD and JPY have broadly paid off while the performance of EM trades has been more mixed.
The commodity currencies underperformed (led by NOK and RUB, but also CAD, AUD, and NZD) against a generally firmer USD and DXY regained levels above 93.0.
We have been shifting our portfolio by rotating out of long positions in commodity currencies, preferring commodity importers. We believe risks are skewed for EMEA EM commodity currencies to underperform in the months ahead, after having outperformed year-to-date.
