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Industry Comment
(Extract from FX Blueprint, January 2010)
We like to go against the consensus and be short USD/JPY (and long the JPY TWI). In our opinion, a move to 95 or higher cannot be ruled out in near-term given the momentum of US data and yields, yet our target is 80-85, so the potential gains on being short USD/JPY outweigh the potential mark-to-market losses. The likely moderation in the rise in US yields and importantly a decline in correlation with yields should support our view. In fact, on the initiation of Fed tightening, USD/JPY has shown a strong tendency in the past to reverse course and decline sharply. We expect euro weakness, but with only a modest target of 1.35-1.40 for the H1. It may end up being one of the smaller range years in a while. The reason is that short-term US yields have already risen sharply, and though the broader growth picture is weaker in the Euro-area than the US, the ECB is likely to hike not too far behind the Fed. Elsewhere in the G10, we would fade AUD outperformance against a basket of CAD, GBP, and NZD. In EMEA, we like to be long RUB, TRY, PLN, RON and ILS versus EUR, long EGP versus USD based on a combination of favourable capital inflows, monetary divergence and valuations. Finally, in Asia we would go long IDR (vs. JPY), KRW (vs. G3) and short USD/TWD. To view full report please click here. |
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