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Historically the pound has fallen towards the end of the year. .... Fed's Dudley Speaks at Cornell University ... Fed's Dudley to Visit Business Site in Ithaca, NY.

FX Strategy G10 Weekly Global Alpha Strategy, 22 October 2010

Global Alpha Strategy Jonas Thulin

Key Focus

+46 8 614 9297 [email protected]

G20…………………………………………….........1 Fredrik Floric

Major Focus Forecast update – no EUR decoupling..…….……....2

+46 8 614 8215 [email protected]

Daniel Nilsmo +46 8 614 8232 [email protected]

Tactical Trading No clear trends…... …………………….……..…….4

Nils Rosendahl

Nordea G10 Carry Index

Boris Simonder, CMT

We are long AUD/CHF and AUD/USD.……..……..5

Central Bank Watch Meeting Calendar …………………….….…….......6 What’s priced in? …. .……………………………...7

Forecast and Forward monitor …………………..……. ……………….…………..8

Volatility SEK vol rich, JPY vol cheap....……. …………...…9

Correlation Tracker SEK - correlation meltdown………………....……10

Seasonality October strong for commodities ………………..…12

Technical Analysis ……………………………………………………..13

G10 Calendar ………………………………………………….....15

+46 8 614 9936 [email protected]m

+46 8 614 7258 [email protected]

Key Focus Chart of the week G20 The pressure is on to weaken Asian FX rates whilst stopping the sell off in the USD. We look for a lack of concrete agreement and action, despite the US who is pushing for a statement of cooperation - making such an agreement more likely at the Seoul meeting in November. While we don't think there is much disagreement on wanting more stable FX rates, the global economic cycle spells a different outcome. As the cyclical roll over is mostly visible in indicators this means that, for now, the US has to do more monetary stimulus compared the Asian counterparties. However, that stimulus has, according to us, been priced in, see below for more analysis on the USD. Next week; we keep an eye on US regional business confidences, expected a tad lower, but it will be balanced by consumer confidence data, which have severely lagged the equity progress so far this autumn. As such we still see a regime with volatile spot moves (VIX futures signal that this could spread to the equity market).

40

0.5

30

0.4

20

0.3 0.2

10

0.1

0

0.0

-10

-0.1

-20

-0.2

-30

-0.3

-40

-0.4

-50

-0.5

-60 92

-0.6 94

96

98

00

02

04

06

08

10

Detrended S&P 500 United States, ABC Consumer index

Fig 2 – QE/intervention having an impact on EUR/USD (through interest rate spreads)

90 1.40

80

1.35

70 60

1.30

50 1.25

40 30

1.20

EUR

1.15

20

1y Swap Yield Spread

1.10 Jun 10

Jul 10

10 0 Oct 10

Sep 10

Fig 3 – Fair values displayed as number of standard deviations the spot is from its long term fair value. Among commodities AUD and NZD stands out as highly over valued.

2.0 1.5 1.0 0.5 0.0 USDCAD

-1.0

NZDUSD

-0.5

AUDUSD

No decoupling in Europe USD saw some impressive gains after PBOC surprise decision to hike rates, which were retraced as the market returned focus on the potential for further QE from the Fed (again, priced in according to us). As we close in on the November meeting, we think, the market will re-estimate the size and tactic from the Fed towards an initial USD 80-100bn and then monthly injections. In the case of the EUR we do not disregard indicators like ZEW and our model for industrial production etc., which point towards an imminent slowdown in the euro zone. Hence, the USD will come back and we are expecting EURUSD to trade lower by the end of the year. In UK we are looking for additional QE (see “Sterling – Further QE on the way?”, sent 20 Oct). In addition, GBP shows a strong seasonal effect (p11) and risk remains on the upside for EURGBP. Scandies On the Nordic markets all eyes will be on the central bank meetings next week. In Sweden the market is currently discounting three straight hikes of 25bp but longer out the curve is very flat. Hence, the support from interest rate differentials is abating as RIX delivers what has already been priced. Additionally, since the global (and Swedish) business cycle is turning (not referring to GDP which is the slowest data available), SEK is loosing steam day by day. Norge’s Bank has a new governor from 1/111, Mr Olsen. In a speech in August he stated that due to Krone strength any hikes should be postponed to the summer of 2011, a view Nordea already shares. As such we expect NOK weakness, see Tactical Trading positions. AUD & NZD looks stretched vs USD Both AUD and NZD have gained on the dollar weakness. However, they both trade well above fair value according to our model and we think these are best traded against crosses such as the Scandies to avoid the USD trade.

Fig 1 – As can be seen below, the residual to the growth trend in S&P 500 is usually closely correlated to consumer confidence, but price action has yet to be reflected and QE has thus so far failed.

1

Major Focus – Forecast update Forecast update Troubles for EUR lays ahead The first half of 2010 was characterized by broad EUR weakness due to the ongoing sovereign debt crisis in peripheral European countries (many predicted the end of the euro). However, the weak EUR paved the way for an export lead recovery among European countries (read Germany) and lately we have seen focus shift towards the slowing US economy and expectations of additional QE from the Fed, resulting in broad USD weakness. Looking forward we think the troubles for the euro are far from over. First of all, the aforementioned recovery relies heavily on export growth which we expect to slow towards the end of the year together with the rebound in world trade (a strong EUR isn’t helping). In addition, as highlighted by our economists, we wouldn’t be surprised to see the market theme once again shifting towards the sovereign debt problems in European peripherals with Portugal looking increasingly vulnerable (see “Sovereign debt crisis smoulders”, sent 24 Sep).

Fig 1 – Europe is slowing down

Fig 2 – Europe will not decouple

Stepwise QE would work in favour for USD At the same time as we are expecting investors to demand a higher risk premium on EUR denominated assets we expect the US elections to remove much uncertainty from the dollar. In addition, our view is that relative stronger data in Europe and additional QE is priced in (see “FX Ideas – The Final Phase...”, 11 Oct). Instead, we wouldn’t be surprised to see the Fed communicating that additional QE will come in a series of smaller steps – more in line with traditional policy – and as such the market is bound to be disappointed (Lockhart enforced this view in an interview last Tuesday). Thus, the market’s hopes for QE2 could be a bit too high, which with regard to current IMM speculative positioning (that at these levels can be view at stretched) implies we could be in for a re-pricing. Fig 3 – Momentum in Short USD speculative positions is abating

EURUSD above Fair Value From a fair value perspective, based on rate differentials and risk sentiment, we notice that EURUSD is very rich. In comparison with the price action earlier this summer, which was supported by the fair value model, it is yet another parameter suggesting how great the expectations of further QE are (Fig 4).

1.40

25,000

1.38 1.36

20,000

1.34 1.32

15,000

1.30 1.28

10,000

Our fair value model is currently suggesting EURUSD around 1.35 and as we are anticipating higher volatility later this year, which benefits USD due to the status as global reserve currency. Hence, we forecast EURUSD at 1.35 in 3 months. Next year, we expect renewed acceleration in US growth while the Euro area is less dynamic which will raise US rate expectations and bring EURUSD towards 1.25.

1.26 1.24

5,000

1.22 0 May

1.20 Jun

Jul

Aug

Sep

Oct

EUR/USD Short speculative USD positions, lhs

A weaker GBP Usually a stronger USD also lifts GBP but in UK the recovery is based on unstable grounds and surveys suggest growth will slow to almost zero next year. Therefore, in our view, the sharp tightening of fiscal policy will pave the way for BoE to continue

2

Major Focus Forecast update signaling a very easy monetary policy (despite relatively high inflation) and additional QE. Therefore, we are anticipating GBP weakness further down the road.

Fig 4 – EUR/USD is overvalued 1.60 EURUSD

1.55

The business cycle will take over Our JPY forecast still reflects the cyclical slowdown that is happening in the Japanese economy. Being a historically cyclical currency we think that this will guide the JPY in the years to come. As of late this regime has been overrun by the ‘carry / risk unwind’, our fair value model argues that this can only go so far. As such we look for a gradually weaker JPY in the years to come. Conclusion Once we have left FOMC's meeting behind us we believe the market will reassess the European growth outlook which would lead to interest rate spreads narrowing and leave EURUSD closer to 1.30 than 1.40 by the beginning of next year. UK is going to engage in massive cuts in fiscal spending which will lead to GBP weakness and the business cycle will guide the JPY going forward.

1.50

Fair Value

1.45

90% bounds

1.40 1.35 1.30 1.25 1.20

1.15 Jan Feb Mar Apr May Jun Jul Aug Sep Oct

Residual 0.10 0.05

Residuals

0.00 Jan Feb Mar Apr May Jun Jul Aug Sep Oct -0.05 -0.10

Fig 5 – USD/JPY vs Business cycle

Daniel Nilsmo Nils Rosendahl Jonas Thulin

Fig 6 – Forecast updates New Cross

3M

6M

12M

24M

EURUSD

1.350

1.250

1.200

1.200 110.0

USDJPY

86.00

90.00

98.00

GBPUSD

1.540

1.480

1.450

1.550

EURCHF

1.320

1.300

1.280

1.360

Old Cross

3M

6M

12M

24M

EURUSD

1.320

1.270

1.200

1.150 110.0

USDJPY

86.00

90.00

98.00

GBPUSD

1.590

1.549

1.500

1.494

EURCHF

1.340

1.300

1.280

1.280

3

Tactical Trading No clear trends The spot environment is volatile, and yet without any new range or trend being created. As such we see massive P&L swings in marked to market, but without take profit or stop loss levels being reached. All in all it is a wait and see and looking at the weekend we would anticipate stronger USD and JPY as possible outcomes. We cut down our JPYNOK (short) position as the momentum had turned – at this point we expect more working on the position as the model tries to adapt to the ever developing market environment.

Open Trades Cross

Long / Short

Current Spot Level

Spot Level

Profit Level

Loss Level

Date

In the Money

JPYNOK

SHORT

7.2202

7.072

6.5

7.405

16-Sep-10

-2.10%

EURAUD

LONG

1.4208

1.4017

1.5

1.37

29-Sep-10

1.36%

EURSEK

LONG

9.2800

9.297

9.55

9.16

08-Oct-10

-0.18%

CHFNOK

LONG

6.0207

6.0845

6.3

5.96

12-Oct-10

-1.05%

NZDNOK

LONG

4.3792

4.4295

4.6

4.31

20-Oct-10

-1.14%

Track Record

Portfolio return vs a Beta Currency Index Since Trades Activated # Days Down # Days Up

211 576

Average USD Down Average USD Up Ratio Win/Lose (days) Gain to Loss Ratio (USD)

-33129 55112 2.7 1.7

Max Monthly Down (%) Max Monthly Up (%)

-2.06 3.54

135 130 125 120 115 110 105 100

Year 2007 2008 2009 2010

JAN 0.53 -0.75 -0.77 0.00

Daily Marked-to-Market Monthly Information Ratio Weeky Information Ratio Daily Information Ratio % Losing Months

0.56 0.30 0.14 25%

Realized P/L Sharpe Ratio

1.42

FEB 1.21 1.18 -0.48 1.12

MAR 0.39 2.52 0.95 3.54

APR 0.09 0.00 0.67 2.40

95

MAY 0.88 0.00 -2.07 1.11

90 Jan-07

Oct-07

Jul-08

Nordea

JUN -0.30 0.00 1.46 -0.51

JUL 0.45 0.69 0.67 0.12

AUG 0.12 3.34 -0.71 -0.03

SEP 0.83 2.65 1.32 1.27

Apr-09

Jan-10

Oct-10

Barclays Currency Index

OKT 0.54 0.53 1.89 -0.09

NOV 2.75 -0.22 -1.21

DEC 0.95 2.40 0.99

Year Return 8.44 12.34 2.72 8.93

4

Nordea G10 Carry Index Current carry environment fair Nordea G10 Carry Index is currently long AUD funded in CHF and USD, exposure is currently 67% of total index notional. Over the last week the index performance has been -0.4%, YTD the index has delivered +11%. The strategy’s correlation based risk index is currently at depressed levels suggesting turbulence is low and carry environment to be fair. However the momentum filter has blocked long AUD funded in JPY, hence exposure is only 67% of index notional. Nordea G10 Carry Index Nordea G10 Carry Index is seeking value from investing in high yield currencies by funding in low yield currencies. The index buys maximum three high yield currencies and sells maximum three low yield currencies. The index is long carry only if i) risk aversion is appropriate and ii) momentum is in favor, otherwise exposure is flat, suggesting carry is never to be reversed. Weights are updated on daily basis (Swedish business days). The index strategy has been optimized and back tested using 9 years of data, including about 2500 trading days. Results of the back tests are presented below.

YTD performance of Nordea G10 Carry Index 115

YTD evolvement of correlation based risk index 70

Nordea G10 Carry Index (lhs)

113

60

111

50

109

40

107

30

105

20

103

10

101 Mar

Apr

May

Jun

YTD preformance Cumulative Return Annualized Volatility Information Ratio*

Jul

Jul

Aug

Sep

0 Jan

Feb

May

Jun

Jul

Jul

Aug

Sep

10.99% 9.68% 1.42

100%

-3.10%

67%

Max Monthly Drawdown

-3.35%

33%

-1.88%

Profitable Months

68.80%

NZD

Max Quarterly Drawdown

CAD

-3.08%

AUD

Max Monthly Drawdown

CHF

1.66

GBP

5.61%

-33%

JPY

Annualized Volatility

0% USD

9.34%

Long

EUR

2002-2010

Annualized Return Information Ratio

Apr

Current positioning

2010-

Max Weekly Drawdown

Results from back test

Mar

NOK

Feb

SEK

99 Jan

-67% -100%

Short

* Information Ratio is calculated as annualized return over annualized volatility.

5

Central Bank Watch – Meeting Calendar The Swedish central bank continues to price in around 30bps more than the rest of G10 on a 1y horizon.

100

What's priced in, 1yr (bps)

90 80

8688

Last week

70 5352

60

This month there will be announcements from BoC, RBNZD, BoJ, Norges Bank and the Riksbank.

50 35

40

25

30 20 10

2

47 43

2931

26 1214

8 10

6

6

0 NB

RIX

SNB

RBA

RBNZD

BoE

BoC

ECB

BoJ

-1 -1 FED

Note: “What’s priced in over 1y” looks at 1m/Xm fwd OIS and STINA rates (X=1, 2… to 12). Hence, ECB seems to be in tightening mood although Refi-rate expectations are around 0 the coming year.

-10

Source: Bloomberg

ECB

FED

BoC

BoE

RBA

RBNZD

SNB

BoJ

RIX

04 Nov 10 02 Dec 10 02 Mar 11 02 Apr 11 02 May 11 02 Jun 11 02 Jul 11 02 Aug 11 02 Sep 11 02 Oct 11 ---

03 Nov 10 14 Dec 10 26 Jan 11 16 Mar 11 28 Apr 11 23 Jun 11 21 Sep 11 ------

19 Oct 10 07 Dec 10 20 Jan 11 03 Mar 11 21 Apr 11 02 Jun 11 21 Jul 11 09 Sep 11 -----

04 Nov 10 09 Dec 10 08 Jan 11 05 Feb 11 05 Mar 11 09 Apr 11 07 May 11 10 Jun 11 08 Jul 11 05 Aug 11 09 Sep 11 07 Oct 11

02 Nov 10 07 Dec 10 01 Feb 11 01 Mar 11 05 Apr 11 03 May 11 07 Jun 11 05 Jul 11 02 Aug 11 06 Sep 11 05 Oct 11 --

28 Oct 10 09 Dec 10 27 Jan 11 10 Mar 11 28 Apr 11 09 Jun 11 28 Jul 11 15 Sep 11 -----

09 Dec 10 10 Mar 11 16 Jun 11 15 Sep 11 ---------

28 Oct 10 16 Nov 10 21 Dec 10 25 Jan 11 17 Feb 11 15 Mar 11 07 Apr 11 28 Apr 11 20 May 11 14 Jun 11 07 Sep 11 05 Oct 11

26 Oct 10 15 Dec 10 09 Feb 11 13 Apr 11 05 Jul 11 01 Sep 11 -------

6

Central Bank Watch – what’s priced in? USD 0.25 SEK stands out among the G10 currencies as the one market where additional tightening has been priced in since last week (JPY has come up 1bp in the front as well). However, in all the other G10 currencies we notice that the markets have lessen their expectations of furhter rate hikes.

+5

+3

+3 -

+1

-

-1

-2

-1

-2

-2

-3 -5 Aug 10

Dec 10

Current accumulated rate changes per meeting date are shown in each figure as well as last week's pricing.

EUR 1.00

-2

Mar 11

Jun 11

Last week

Oct 11

FOMC

GBP 0.50

+5

+10

+3

+8

+1

+6 -

-

-

-

-

-

-

-

-

-1

+6 +4

+4 +1

+2

-3

+1 +1 +1 +1

+1 +1

-

-

-5 Aug 10

Dec 10

Mar 11 Last week

Jun 11 ECB

Oct 11

AUD 4.50 +45 +40 +35 +30 +25 +20 +15 +10 +5 -

Dec 10

Mar 11

Jun 11

Last week

Oct 11

BoE

CHF 0.25 +31

+33

+35

+40 +40

+26 +21 +15 +8 -

Aug 10

Dec 10

Mar 11

Jun 11

Last week

Oct 11

+30 +25 +20 +15 +10 +5 -5 Aug 10

+19 +10 +5 -

-

Dec 10

Mar 11

Jun 11

Last week

RBA

NZD 3.00

Oct 11

SNB

JPY 0.10 +49

+60 +41

+50

+20 --

-

+5

-

+1

+21

+30

+5 +3

+31

+40

+10

Aug 10

+11

-2

-1

-1

-2

-2 -2 -2 -2 -2 -2

-3

-

-5

-10 Aug 10

Dec 10

Mar 11 Last week

Jun 11 RBNZD

Oct 11

SEK 0.75 +83

+100

+93

+99

Oct 11

BoJ

+27

+30

+23 +19 +15

+20

+46

+11

+15

+24

+7

+10

-

+5

Aug 10

Jun 11

+25

+68

+80

+20

Mar 11 Last week

+35

+120

+40

Dec 10

CAD 1.00

+140

+60

Aug 10

-

+3

Dec 10

Mar 11 Last week

Jun 11 RIX

Oct 11

Aug 10

Nov 10

Jan 11 Apr 11 Jul 11 Last week BoC

Oct 11

7

Forecast and Forward Monitor In the graphs below we display our forecasts together with consensus and forward price. To visualize volatility and skew we plot the 5 delta and 25 delta strikes. These can be seen as the boundaries for the future spot price implied by options with 90% respectively 50% probabilities. EURSEK EURNOK 12.0

3M 6M 9M 12M 12.0

10.5

3M 6M 9M 12M 10.5

11.5

11.5

10.0

10.0

11.0

11.0

10.5

10.5

10.0

10.0

9.5

9.5

9.5

9.5

9.0

9.0

8.5

8.5

8.0

8.0

9.0

9.0

8.5

8.5

7.5

7.5

8.0 May 08 Nov 08 May 09 Nov 09 May 10 Nov 10 May 11

8.0

7.0 May 08 Nov 08 May 09 Nov 09 May 10 Nov 10 May 11

7.0

5 Delta (90%) EURSEK

25 Delta (50%) C onsensus

5 Delta (90%) EURNOK

Fwd Nordea

EURUSD

Fwd Nordea

EURGBP

1.9 1.8

3M 6M 9M 12M 1.9 1.8

1.7 1.6

1.7 1.6

1.5 1.4

1.5 1.4

1.3

1.3

1.2

1.2

1.1 1.0

1.1 1.0

0.9 May 08

0.9 Nov 08

25 Delta (50%) C onsensus

May 09

5 Delta (90%) EURUSD

Nov 09

May 10

Nov 10

25 Delta (50%) C onsensus

May 11

1.20

3M 6M 9M 12M 1.20

1.15

1.15

1.10

1.10

1.05 1.00

1.05 1.00

0.95 0.90

0.95 0.90

0.85 0.80

0.85 0.80

0.75 0.70 May 08 Nov 08 May 09 Nov 09 May 10 Nov 10 May 11

0.75 0.70

Fwd Nordea

5 Delta (90%) EURGBP

EURCHF

25 Delta (50%) C onsensus

Fwd Nordea

NZDUSD

1.7

3M 6M 9M 12M 1.7

1.0

3M 6M 9M 12M 1.0

1.6

1.6

1.5

1.5

0.9

0.9

1.4

1.4

0.8

0.8

1.3

1.3

0.7

0.7

1.2

1.2

1.1

1.1

0.6

0.6

1.0 May 08

1.0 Nov 08

May 09

5 Delta (90%) EURC HF

Nov 09

May 10

Nov 10

25 Delta (50%) C onsensus

May 11 Fwd Nordea

May 09

Nov 09

May 10

Nov 10

25 Delta (50%) Nordea

May 11 Fwd C onsensus

USDCAD

1.3

3M 6M 9M 12M 1.3

1.2

1.2

1.1

1.1

1.0

1.0

0.9

0.9

0.8

0.8

0.7 Nov 08

0.5 Nov 08

5 Delta (90%) NZDUSD

AUDUSD

0.6 May 08

0.5 May 08

May 09

5 Delta (90%) AUDUSD

Nov 09

May 10

25 Delta (50%) Nordea

Nov 10

May 11 Fwd C onsensus

1.4

3M 6M 9M 12M 1.4

1.3

1.3

1.2

1.2

1.1

1.1

1.0

1.0

0.7

0.9

0.9

0.6

0.8 May 08

0.8 Nov 08

May 09

5 Delta (90%) USDC AD

Nov 09

May 10

25 Delta (50%) Nordea

Nov 10

May 11 Fwd C onsensus

8

Volatility Current 1M ATM volatility vs. 3 month mean Figure 1. Divergence of 1M implied vol from 3 months mean. Z-Score = (current – mean)/stdev 2.5

Volatility Rich

2.0 1.5 1.0 0.5

-2.0

JPYSEK

EURJPY

JPYNOK

USDJPY

EURCHF

USDCAD

GBPUSD

EURGBP

GBPSEK

NZDUSD

CHFNOK

EURSEK

EURNOK

USDSEK

GBPNOK

USDNOK

CHFSEK

-1.5

EURUSD

-1.0

AUDUSD

0.0 -0.5

NOKSEK

Z-Score

Volatility is in general up compared to the last three months. Exceptions are JPY-crosses where current volatility is below or around the three month mean, suggesting bets are on for JPY to range close to its 15-year low.

Volatility Cheap

Current 1M ATM volatility vs. realized Figure 2. Residual from regressing 1M implied vol against realized vol. Z-Score = (current – regression value)/stdev. Realized vol calculating using an exponentially weighted moving average. For the regression we use one year data. 4.0

Volatility Rich

3.0 2.0 1.0

-3.0

JPYSEK

NZDUSD

AUDUSD

EURJPY

USDSEK

GBPNOK

EURUSD

GBPUSD

NOKSEK

JPYNOK

USDCAD

USDJPY

USDNOK

CHFNOK

EURGBP

CHFSEK

EURSEK

-2.0

GBPSEK

-1.0

EURCHF

0.0 EURNOK

Z-Score

Volatility for all crosses seem stretched, also compared to current realized volatility. Especially volatility in different SEK crosses is expensive – indicating hedging prior upcoming Riksbank meeting.

Volatility Cheap

ATM volatility heat map Looking on the term structure we notice that USDSEK and EURUSD vol is rich especially in the front end whereas further out volatilities are closer to months mean. JPY vol is cheap all over the term structure, especially against SEK. 2W

EURUSD EURJPY EURGBP EURCHF EURSEK EURNOK USDSEK JPYSEK GBPSEK CHFSEK NOKSEK USDNOK JPYNOK GBPNOK CHFNOK AUDUSD USDCAD NZDUSD GBPUSD USDJPY Very Rich Rich Neutral Cheap

Rich/ Cheap

2.3 -0.9 0.9 -0.1 1.7 0.4 2.4 -1.0 0.9 2.6 1.2 2.5 -0.7 1.7 0.8 3.1 0.6 2.5 0.9 0.0

1M

Vol

ZScore

Rich/ Cheap

14.0 13.3 10.3 11.0 9.3 8.8 16.2 16.3 11.3 13.1 7.8 16.2 16.0 12.5 11.8 16.3 11.8 16.0 11.1 11.7

2.4 -1.2 1.1 -0.2 2.0 1.4 2.2 -1.4 1.1 1.9 1.9 2.0 -0.9 1.4 1.4 2.5 0.9 2.3 2.0 0.0

1.7 -0.9 0.8 0.1 0.9 0.4 1.8 -1.0 0.8 1.9 0.8 2.1 -0.8 1.6 0.8 2.0 0.9 1.2 0.7 0.0

Z-Score > 2

2M

Vol

ZScore

Rich/ Cheap

13.6 13.4 10.3 10.9 8.5 8.8 15.8 16.4 11.3 12.5 7.3 15.8 16.1 12.5 11.8 15.3 12.3 15.2 11.1 11.6

1.6 -1.6 1.4 0.1 1.4 1.4 1.5 -1.8 1.4 1.6 2.0 1.6 -1.2 1.6 1.4 1.9 1.3 1.4 1.3 0.0

1.5 -1.1 0.6 0.2 0.8 0.2 1.6 -1.3 0.6 1.8 0.6 1.8 -1.1 1.3 0.6 1.6 0.7 0.9 0.5 0.0

3M

Vol

ZScore

Rich/ Cheap

13.6 13.6 10.3 10.7 8.5 8.7 15.8 16.5 11.3 12.5 7.2 15.8 16.2 12.5 11.8 15.4 12.3 15.3 11.3 11.8

1.7 -1.9 1.7 0.3 1.5 0.9 1.6 -2.1 1.6 1.6 1.8 1.7 -1.7 1.7 1.1 2.0 1.3 1.4 1.2 0.0

1.2 -0.9 0.4 0.2 0.8 0.1 1.3 -1.0 0.5 1.8 0.5 1.5 -0.7 1.2 0.6 1.2 0.7 0.6 0.3 0.0

6M

Vol

ZScore

Rich/ Cheap

13.5 14.2 10.4 10.4 8.5 8.7 15.7 17.2 11.4 12.4 7.1 15.7 16.9 12.7 11.9 15.2 12.6 15.2 11.4 12.0

1.6 -1.5 1.3 0.3 1.6 0.5 1.5 -1.6 1.3 1.6 1.8 1.6 -1.1 1.5 1.1 1.8 1.5 1.0 0.8 0.0

0.9 -0.7 0.3 0.4 0.7 0.0 1.0 -0.8 0.3 1.7 0.4 1.2 -0.5 0.8 0.5 1.1 0.7 0.5 0.3 0.3

1Y

Vol

ZScore

Rich/ Cheap

Vol

ZScore

13.6 15.3 10.9 10.2 8.5 8.7 15.8 18.3 11.9 12.4 7.1 15.7 17.9 12.9 11.8 15.7 13.0 15.8 12.0 12.7

1.4 -1.4 1.3 0.5 1.6 0.2 1.4 -1.6 1.3 1.6 1.9 1.6 -0.9 1.5 1.0 1.9 1.8 1.1 0.9 0.6

0.6 -0.6 0.3 0.5 0.6 0.0 0.7 -0.6 0.3 1.5 0.3 0.9 -0.3 0.6 0.0 0.9 0.6 0.4 0.2 0.4

13.7 16.3 11.5 9.9 8.5 8.8 15.9 19.3 12.5 12.3 7.1 15.8 19.0 13.3 10.8 16.0 13.3 16.3 12.6 13.5

1.2 -1.3 1.0 0.7 1.6 0.1 1.4 -1.4 1.0 1.5 1.7 1.5 -0.7 1.4 0.1 1.9 1.6 1.1 0.9 1.0

Vol is current ATM volatiltiy, data as of 21 Oct 2010

1 < Z-Score < 2

Rich/Cheap = current ATM volatility - 3 month average ATM volatiltiy

-1 < Z-Score < 1 -2 < Z-Score < -1

Z-Score = (current ATM volatility - 3 month average ATM volatiltiy)/stdev, e.g. how many standard deviation current ATM vol is from mean.

Very Cheap Z-Score < -2

9

Correlation Tracker Scandies see correlation breakdown For Scandies we see a major correlation breakdown. Previously high and stable correlations with interest rate differential and risk sentiment (VIX) have lately faded for EURSEK and we now see a shift in sign for correlation to cross asset slope. In the case of EURNOK we notice a rebound in the previously low correlation with interest rate differential. EUR positively correlated with gold Interesting is that EURUSD correlation with gold has turned positive (suggesting EUR and gold are moving in tandem). EURCHF shows high correlation with rate differential while for USDJPY we see no stable correlators, likely a result from the overhanging intervention threat. Commodities risk driven Turning to commodities all but CAD have faded in correlation with interest rate differential, and have lately correlated more strongly with risk sentiment. The high correlation to EURUSD for almost all of these suggests that much of the movements comes form the dollar itself. EURSEK

EURNOK

50% 20%

10% -20%

-30% -70% 29-Jul

13-Aug 28-Aug 12-Sep 27-Sep 12-Oct

EURUSD

SP500

Gold

EURSEK2/10

-60% 29-Jul 13-Aug 28-Aug 12-Sep 27-Sep 12-Oct EURUSD Brent Gold EURNOKRateDiff Highest Short-Term Correlations to EURNOK

Highest Short-Term Correlations to EURSEK EURUSD

SP500

Gold

EURSEK2/10

Gold

Brent

EURUSD

EURNOKRateDiff

-47%

-34%

-31%

28%

-35%

-32%

-27%

27%

Highest Long-Term Correlations to EURSEK SP500

VIX

Brent

Copper

-47%

46%

-28%

-26%

EURUSD

Highest Long-Term Correlations to EURNOK SP500

VIX

Brent

Copper

-48%

45%

-40%

-28%

EURGBP

80% 70%

40% 30%

0%

-10%

-40% -80% 29-Jul

13-Aug 28-Aug 12-Sep 27-Sep 12-Oct

SP500

VIX

Brent

Gold

-50% 29-Jul

13-Aug 28-Aug 12-Sep 27-Sep 12-Oct

EURUSD

SP500

Gold

EURGBPBasis

Highest Short-Term Correlations to EURGBP

Highest Short-Term Correlations to EURUSD Gold

SP500

Brent

VIX

EURUSD

SP500

EURGBPBasis

Gold

74%

68%

49%

-48%

76%

51%

-48%

40%

Highest Long-Term Correlations to EURUSD SP500

EURUSDRateDiff

VIX

EURUSD2/10

49%

39%

-33%

-28%

Highest Long-Term Correlations to EURGBP EURUSD

EURGBPRateDiff

SP500

EURGBPBasis

54%

17%

13%

-10%

10

Correlation Tracker EURCHF

USDJPY 60%

70%

20%

30%

-20%

-10% -50% 29-Jul 13-Aug 28-Aug 12-Sep 27-Sep 12-Oct EURUSD SP500 Gold EURC HFRateDiff

-60% 29-Jul 13-Aug 28-Aug 12-Sep 27-Sep 12-Oct EURUSD SP500 Gold USDJPYRateDiff Highest Short-Term Correlations to USDJPY

Highest Short-Term Correlations to EURCHF EURUSD

SP500

EURCHFRateDiff

Gold

EURUSD

Gold

SP500

USDJPYRateDiff

67%

49%

46%

38%

-56%

-36%

-33%

29%

Highest Long-Term Correlations to EURCHF EURUSD

SP500

VIX

EURCHFRateDiff

49%

37%

-26%

24%

AUDUSD

Highest Long-Term Correlations to USDJPY VIX

SP500

USDJPY2/10

Brent

-42%

42%

26%

19%

NZDUSD 70%

70%

30%

30%

-10%

-10%

-50%

-50% -90% 29-Jul

13-Aug 28-Aug 12-Sep 27-Sep 12-Oct

EURUSD

SP500

VIX

Gold

-90% 29-Jul

13-Aug 28-Aug 12-Sep 27-Sep 12-Oct

EURUSD

SP500

VIX

Gold

Highest Short-Term Correlations to NZDUSD

Highest Short-Term Correlations to AUDUSD EURUSD

SP500

Gold

VIX

EURUSD

SP500

Gold

VIX

90%

76%

73%

-58%

86%

84%

77%

-62%

Highest Long-Term Correlations to AUDUSD SP500

VIX

EURUSD

Brent

78%

-65%

61%

44%

USDCAD 70% 30% -10% -50% -90% 29-Jul 13-Aug 28-Aug 12-Sep 27-Sep 12-Oct EURUSD SP500 Gold USDC ADRateDiff Highest Short-Term Correlations to USDCAD EURUSD

Gold

USDCADRateDiff

SP500

-83%

-77%

73%

-71%

Highest Long-Term Correlations to USDCAD SP500

VIX

EURUSD

USDCADRateDiff

-78%

64%

-55%

51%

Highest Long-Term Correlations to NZDUSD SP500

EURUSD

VIX

Brent

71%

62%

-54%

40%

Fact Box We display the movements in realized correlation between the major currency crosses and important drivers. For each currency cross short-term correlation movements are displayed in the graphs. In the tables we display the highest short-term and long-term (1Y) correlated assets. Short-term correlations are calculated using an exponentially weighted moving average (EWMA), a method designed to quickly pick up changes. The drivers considered for each currency cross are EURUSD spot, S&P 500, Chicago Board Options Exchange Volatility Index (VIX), gold, copper, CRB Metals Index, Brent crude oil, slope in cross asset rate curve (2Y/10Y swap rates), difference in basis spreads (OIS v.s. Libor 3M), and difference in short rates (4th FRA contract)

11

Seasonality October – Commodities strong Commodity currencies NZD and AUD have historically preformed in October and appreciated against the dollar in 7 out of the last 10 years. 100%

Percentage of last 10 years when currency 60% cross has appreciated in October 20%

70%

70%

60%

60%

50%

50%

50%

EURNOK

EURSEK

EURUSD

EURGBP

EURCHF

60%

60%

20%

Percentage of last 10 years when currency 60% cross has depreciated in October

NZDUSD

AUDUSD

USDCAD

USDJPY

100%

November – Weak pound Historically the pound has fallen towards the end of the year. In November we saw a depreciation of the pound against the EUR in 9 out of the last 10 years. If anything else, NZD and AUD have both been strong in November, whereas NOK and USD have fallen against the EUR in 7 out of the last 10 years. 100%

Percentage of last 10 years when currency 60% cross has appreciated in November 20% 20%

Percentage of last 10 years when currency 60% cross has depreciated in November

90%

70%

70%

70%

70% USDCAD

EURCHF

50%

50%

USDJPY

EURSEK

60%

60%

EURGBP NZDUSD

AUDUSD

EURNOK

EURUSD

100%

December – Pound continues to underperform The weakening trend of the pound from the previous month continues; we see that the pound has fallen against the euro in 8 out of the last 10 years, whereas the kiwi has been strong and appreciated against the USD in December in 8 out of the last 10 years. 100%

Percentage of last 10 years when currency 60% cross has appreciated in December 20% 20%

Percentage of last 10 years when currency 60% cross has depreciated in December

80%

80% 60%

NZDUSD

60%

60%

60%

60%

50%

USDCAD

EURGBP AUDUSD

EURCHF

EURNOK

EURSEK

EURUSD

USDJPY

60%

100%

12

Technical Analysis EUR/USD – weekly view

AUD/USD – weekly view

So far the cross continues to ride on the QE-theme and general risk appetite - For the short term (0-1 month) the trend is currently consolidating after the big run-up from 1.2640-level. However, a bullish case could be considered above 1.4060. For the bearish case, a move below 1.3820 would be considered. Upside resistance: 1.42, 1.4582/88. Downside support: 1.37, 1.3440, 1.3333

During this accelerated uptrend buyers are setting successive new highs. The cross also enjoys the current climate of risk with commodities and equity markets setting new daily highs. However, we do caution the prospects of profit-taking against the recent run-up. Upside resistance: Partiy, 1.04 Downside support: 0.9847, 0.94

EUR/SEK – weekly view

EUR/CHF – weekly view

The cross continues to trade within a falling trend from a long term perspective (1-12 months). However, short term trend (0-1 months) is considered as rising as long as the exchange rate stays above 9.21/20, and the relative strength curve between OMXS 30 and Euro STOXX is weak. Upside resistance: 9.3640, 9.52 Downside support: 9.21/20, 9.08, 9-8.95

The medium term trend is being challenged as the cross has broken and closed above the falling trendline. Much of this move comes against the recent buying of most EUR crosses. A break above 1.3684 could ignite additional gains towards 1.3924 level. Upside resistance: 1.3684, 1.3924 Downside support: 1.3066, 1.2757

13

Technical Analysis EUR/NOK – weekly view

USD/JPY – weekly view

The general trend is still within a neutral range between 8.2350-7.80. At this point in time it's unclear which trend will emerge. Risk appetite for NOK seems to have been subdued as investors await the up-and-coming monetary policy report on October 27th. Upside resistance: 8.1875, 8.2350 Downside support: 7.80, 7.67

With the break below 82.85 the trend is clearly bearish on short, medium/long term (0-12 months) However, the closer the exchange rate approaches all-time-low at 79.70, the bigger the risk for some kind of market intervention or a possible sharp momentum reversal. Upside resistance: 82.85, 85.92 Downside support: 80.83, 79.70

EUR/GBP – weekly view

USD/CAD – weekly view

The cross is trading within a falling trend-channel with lower highs and lower bottoms. The exchange rate has just stalled right beneath falling trend line at 89. The cross is highly dependent on the direction of EUR/USD and GBP/USD. Thus, a falling EUR/USD is likely to drive EUR/GBP lower. Upside resistance: 0.9150, 0.9411 Downside support: 0.8534, 0.8065

The cross has been ranging between 1.07/08 and 1.02 for most of the year. The recent break of 1.02 would suggest a stronger appetite to own CAD with support from commodity gains and risk-on climate. In addition, speculative trend followers in the futures market have been building long positions in CAD since 14/09/2010. Nonetheless, the ability to stay below 1.02 seems difficult for time being. Upside resistance: 1.07/08 , 1.11 Downside support: 0.9927, 0.98, 0.97

14

G10 Calendar Monday 25-Oct-10 NZ Labour Day 06:00 US Fed's Dudley Speaks at Cornell University 11:00 EU Industrial new orders, sa (m/m) Aug 11:00 EU Industrial new orders, sa (y/y) Aug 14:00 US Fed's Cumming to Speak in Brussels, Belgium 14:30 US Bernanke Speaks at Housing Conference in Virginia 16:00 US Home sales, existing Sep 16:00 US Home sales, existing (m/m) Sep 16:30 US Fed's Dudley to Visit Business Site in Ithaca, NY 18:00 EU ECB's Stark speaks in Frankfurt 19:30 US Fed's Bullard to Give Welcome at St. Louis Conference 23:15 US Former Fed Governor Kohn Speaks on Financial Regulation Tuesday 26-Oct-10 02:00 US Fed's Hoenig Speaks at University of Kansas 06:00 US Fed's Dudley Speaks at University of Rochester 08:00 DE Consumer confidence, Gfk Nov 08:00 GB House prices, nationwide (sa, m/m) Oct 08:00 GB House prices, nationwide (y/y) Oct 08:45 FR Consumer confidence Oct 09:30 IT Consumer confidence Oct 09:30 SE PPI (m/m) Sep 09:30 SE PPI (y/y) Sep 09:30 SE Riksbank announces interest rates 09:30 SE The interest rate decision and the Oct. Monetary Policy Report is published 09:30 SE Trade balance Sep 10:30 GB GDP (q/q, advance) Q3 10:30 GB GDP (y/y, advance) Q3 15:00 US House prices, S&P/Case-Shiller, composite-20 (m/m) Aug 15:00 US House prices, S&P/Case-Shiller, composite-20 (y/y) Aug 16:00 US Consumer confidence Oct Wednesday 27-Oct-10 DE CPI (m/m, preliminary) Oct DE CPI (y/y, preliminary) Oct DE CPI data for six German states Oct 06:00 US Fed's Dudley Speaks at University ot Buffalo 08:45 FR Consumer spending (m/m) Sep 08:45 FR Consumer spending (y/y) Sep 09:30 SE Financial market statistics, household lending (y/y) Sep 10:00 EU M3 (sa, 3mma) Sep 10:00 EU M3 (sa, y/y) Sep 11:00 SE SNDO to auction bonds (SEK 2.5 bn) 13:00 US Mortgage applications, MBA 14:00 NO Norges Bank publishes interest rate decision 14:00 NO Norges Bank publishes new Montary Policy Report 14:30 US Durable goods orders (m/m) Sep 14:30 US Durable goods orders, ex transportation (m/m) Sep 14:45 NO Norges Bank holds press conference after rate decision 16:00 US Home sales, new Sep 16:00 US Home sales, new (m/m) Sep 22:00 NZ RBNZ announces interest rates Thursday 28-Oct-10 JP BoJ announces interest rates 09:15 SE Consumer confidence 09:15 SE Manufacturing confidence 09:30 SE Retail sales (sa, m/m) 09:30 SE Retail sales (y/y) 09:55 DE Unemployment rate (sa) 10:00 NO Business survey, manufacturing 11:00 EU Business climate indicator 11:00 EU Economic confidence 14:30 US Jobless claims, continuing 14:30 US Jobless claims, initial Friday 29-Oct-10 DE Retail sales (m/m) (ecpected 29. Oct. - 5. Nov) DE Retail sales (y/y) (ecpected 29. Oct. - 5. Nov) 00:30 JP CPI, national (y/y) 00:30 JP CPI, national, excluding food and energy (y/y) 00:30 JP CPI, national, excluding fresh food (y/y) 01:01 GB Consumer Confidence, Gfk 09:00 NO Registered unemployment rate (unadj. and excl. labour market sch 09:00 NO Unemployment, registered and persons on labour market scheme 10:00 NO Consumption of goods indicator (m/m) 10:00 NO Housing starts (s/a) 10:00 NO Norges Bank publishes purchases of FX to Pension Fund-Internat 10:00 NO Retail sales (m/m) 11:00 EU CPI, flash estimate (y/y) 11:00 EU Unemployment rate 11:00 IT CPI (m/m) 11:00 IT CPI (y/y) 11:30 CH Leading indicator, KOF 14:30 US Employment cost index (q/q) 14:30 US GDP (q/q annualised, advance) 14:30 US GDP deflator (q/q annualised, advance) 14:30 US PCE prices, core (q/q, annualised) (advance) 14:30 US Personal consumption (q/q annualised, advance) 15:45 US Chicago PMI 16:00 US Consumer confidence, University of Michigan (final)

Nordea

Consensus

4.4m 6.5%

Nordea

Actual

2.0%

-2.4% 11.2%

4.28m 3.6%

4.13m 7.6%

Consensus

Actual

5.1

106.5

1.0% 1.0%

Previous

1.00% 1.0% 0.4% 2.4%

-0.1% 2.0%

2.50% 49.5 Nordea Consensus 0.1% 0.1% 1.3% 1.3%

Actual

Previous

4.9 0.1% 3.1% -35 107.2 -0.5% 1.3% 0.75% 0.75% -2.8bn 1.2% 1.7% -0.13% 3.18% 48.5 Previous -0.1% 1.3%

-1.6% 1.2%

1.5%

0.9% 1.4%

0.5% 1.1%

2.00%

2.00%

2.00%

2.0% 0.5%

-1.3% 2.0%

300k 4.0%

288k 0.0%

Nordea Oct Q3 Sep Sep Oct Q3 Oct Oct

Consensus 0.10%

Actual

9

7.4%

Nordea

453k Consensus

Sep Sep

Actual

Previous 0.10% 28.4 4 0.0% 4.4% 7.5% 5 0.77 103.2 4441k 452k Previous -0.2% 2.2%

-0.6% -1.5% -1.0% Oct Oct Oct Sep Sep Nov Sep Oct Sep Oct Oct Oct Q3 Q3 Q3 Q3 Oct Oct

2.6% 89800

0.8% 1.8%

1.8% 0.4% 1.8% 0.5% 2.2% 1.9% 1.1% 2.3% 58.0 68.0

-20 2.8% 89823 -0.5% 1587 600mill -0.9% 1.8% 10.1% 0.6% 1.6% 2.21 0.5% 1.7% 1.9% 1.0% 2.2% 60.4 67.9

15

Nordea Markets is the name of the Markets departments of Nordea Bank Norge ASA, Nordea Bank AB (publ), Nordea Bank Finland Plc and Nordea Bank Danmark A/S. The information provided herein is intended for background information only and for the sole use of the intended recipient. The views and other information provided herein are the current views of Nordea Markets as of the date of this document and are subject to change without notice. This notice is not an exhaustive description of the described product or the risks related to it, and it should not be relied on as such, nor is it a substitute for the judgement of the recipient. The information provided herein is not intended to constitute and does not constitute investment advice nor is the information intended as an offer or solicitation for the purchase or sale of any financial instrument. The information contained herein has no regard to the specific investment objectives, the financial situation or particular needs of any particular recipient. Relevant and specific professional advice should always be obtained before making any investment or credit decision. It is important to note that past performance is not indicative of future results. Nordea Markets is not and does not purport to be an adviser as to legal, taxation, accounting or regulatory matters in any jurisdiction. This document may not be reproduced, distributed or published for any purpose without the prior written consent from Nordea Markets.

16

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