Global Markets

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Extract from FX Blueprint, April 2010

Euro Stuck

Despite higher US growth, capital is flowing as well to the Euro-area as it is to the US and Euro-area growth pulse has picked up. In our view, the offsetting forces of US twin deficits and possible Fed hikes should keep the euro relatively range-bound.

Not Falling for Yen Bear Trap

We recommend buying the yen against the dollar, euro and pound. All four currencies belong to countries or regions that have poor debt dynamics. But we believe Japan’s current account surplus and deflation backdrop makes it the least likely to suffer a fiscal crisis. So maintaining a core long JPY position should benefit whenever sovereign risk rears its head as the major market theme.

A Sterling Battle

GBP remains trapped in a battle between UK economic out-performance versus sovereign risk concerns—EUR/GBP should range trade over the summer. We are bullish CAD versus EUR and USD, while short AUD/NZD going into the Q1 HLFS on 6 May, as we believe AUD has priced in global growth that is well-above trend. By contrast, the SEK rally still has legs, as this cyclical currency is still undervalued despite signs of recovery in recent months. We expect the Norges Bank to let NOK to rise more gradually. Finally, we note the SNB intervention has been unsuccessful, but that 1.40 would be an attractive level to buy EUR/CHF.

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