FxWirePro: Three macro FX themes for Q1’2018 - High beta, outright and options trades

Load up EUR longs; short USDSEK as a high-beta proxy and add longs in EURJPY outright; stay long EURNZD via options. The major shift in the euro during previous month has come on growth. Following stellar survey data, the economists revised up their growth forecast for 2018 by an eye-catching 0.75%pts.

The chief potential dollar-supportive substances have been unsuccessful to materialize; in their absence, growth has once again emerged as a key driver of currency returns. 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.

With this change which translated into a near 2 sigma growth upgrade for the region, the euro once again started featuring among the best-ranked currencies and as a “buy” on growth momentum globally on December 18th.

While the upside in growth metrics hasn’t really moved the needle on our expectation on ECB policy changes (a moderate QE extension over Q4, ending by year-end), it has lowered somewhat the conviction level in the magnitude of the dip one may see in 1Q’2018.

SEK, which we are already long vs. EUR, is an interesting candidate since it is a high beta currency to European growth and the Riksbank is in play for a policy shift earlier than the ECB. In addition, the wildcard unknown for the dollar is the extent to which repatriation and capital inflows eventually materialize. Compared to EUR, SEK would be more insulated to such flows in the event they emerge. Thus we recommend initiating long SEK vs. USD. Separately, we also initiate long EUR vs JPY. A broad-based improvement in growth is likely to coincide with higher DM yields as well. While it is our view that the BoJ will likely shift policy in 2H, they are unlikely to make any changes in Q1. We, thus, reckon Yen can underperform other stronger-growth G10 currencies and recommend a tactical short.

Finally, we maintain exposure to long EURNZD through options. As noted in chart 1, NZD has significantly decoupled from rate differentials compared to other commodity FX and combined with rich long-term valuations, we continue to be bearish NZD.

Long a 9m 1.80 EURNZD digital call with a 3m 1.80 window KO. Paid 17.5% on November 21. Marked at 18.04%.

Sell USDSEK at8.1505. Stop at 8.3585.

Buy EURJPY at 136.23. Stop at 132.80.