fx compass: the final countdown - capitalsynthesis december 2013rhs) fx compass: the final countdown...
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DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES AND
ANALYST CERTIFICATIONS.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®
Client-Driven Solutions, Insights, and Access
FX Compass: The Final Countdown FX Strategy
Today’s FOMC meeting is very much in play. Surveys suggest that 35%-40% of
market participants, roughly speaking, expect a tapering announcement today.
We continue to think the risk of a Fed move is underestimated as virtually all the
data received since the beginning of the month has been taper-supportive. The
US labor market is registering a fresh bout of strength that now makes the mild
summer slump look to be a brief interruption of an improving trend.
A clean budget deal, stronger growth and employment data, coupled finally with
a bit of firming in core CPI all seem to tick the various boxes on tapering.
If the Fed chooses to skip this meeting it likely would owe to an ultra-cautious
evaluation of prospective liquidity conditions into year end. In absence of a taper
we expect the FOMC to telegraph a January tapering. This would serve to
anchor expectations and immunize the Fed against a potential small moderation
of the data over the coming month.
We favor sticking with core thematic dollar bullish trades that should work
against a backdrop of shifting Fed policy even if they might experience some
short-term volatility.
In particular, we look to dollar pairs where the other central bank is biased to
deliver more easing relative to a Fed that is beginning the process of backing
away from its extraordinary policy measures. Here the two standouts remain
AUDUSD (lower) and USDJPY (higher).
Trade Recommendations
We reiterate our top trades from our year-ahead report. Please see 2014, The
Year of the Dollar for more detail.
1. Short AUDUSD
o AUDUSD digital puts
o 1y AUDUSD puts financed by selling AUDJPY puts
o EURUSD lower, EURAUD higher dual digital
2. Long USDJPY
o 2m USDJPY calls
o USDJPY RKI risk reversals (buying USDJPY call)
o EURUSD lower, EURJPY higher correlation structures
3. Long USD/EM
o 1m USDSGD calls
o 2m USDTRY RKO calls
o 2m USDZAR RKO calls
18 December 2013
Fixed Income Research
http://www.credit-suisse.com/researchandanalytics
Research Analysts
Mark Astley
+44 20 7883 9931
Anezka Christovova
+44 20 7888 6635
Matthew Derr
212 538 2163
Ric Deverell
+44 20 7883 2523
Ray Farris
+65 6212 3412
Helen Haworth
+44 20 7888 0757
Carl Lantz
212 538 5081
Trang Thuy Le
+65 6212 4260
Alvise Marino
212 325 5911
Bhaveer Shah
+44 20 7883 1449
18 December 2013
FX Compass: The Final Countdown 2
In this issue
Focus: The Final Countdown 3
Short AUDUSD 5
Long USDJPY 6
Long USD/EM 7
Buy 1m USDSGD call ............................................................... 7
Buy 2m USDTRY RKO calls ..................................................... 8
Buy 2m USDZAR RKO calls ..................................................... 9
Technical Analysis: AUD and JPY Are Expected To Weaken Further
Into Q1 2014 10
Portfolio Updates 11
FX Forecast Summary 12
18 December 2013
FX Compass: The Final Countdown 3
Focus: The Final Countdown The Fed has a clear window of opportunity to announce a tapering of asset purchases in
today’s FOMC statement. The labor market data has accelerated noticeably across
measures after a minor slowdown in the summer. Real retail sales look to be accelerating
relative to the post-crisis trend. Congress has reached a budget accord that takes the
threat of a Q1 government shutdown off the table.
Inflation data has been notably soft but tapering has always been tied primarily to the labor
market outlook. The prospect of sanguine US price data should be seen as lending credibility
to the “enhanced guidance” that is widely expected to accompany the first tapering.
The main argument for not tapering now would be concern for the typical year-end
reduction in liquidity provision. We think market liquidity has remained strong in the lead-
up to the meeting, however, and would not expect it to falter dramatically in the wake of an
important Fed decision.
Exhibit 1: Labor demand has steadily increased and may have shifted into a higher gear post-shutdown
Exhibit 2: …while real retail sales have been rising at an above-trend rate in recent months
2,000
2,500
3,000
3,500
4,000
4,500
5,000
5,500
5
10
15
20
25
30NFIB: Percent of Firms With Positions NotAble to Fill Right Now (SA, %)
JOLTS: Job Openings: Total (SA, Thous,RHS)
12.60
12.62
12.64
12.66
12.68
12.70
12.72
12.74
12.76
12.78
12.80
Aug-09 Aug-10 Aug-11 Aug-12 Aug-13
Real Retail Sales (log scale)
Aug-09 to Current Trend (3.8% p.a.)
Source: Haver Analytics® Source: Haver Analytics
Should the Fed decide against tapering at today’s meeting we would expect to hear a
strong bias to taper at the next meeting in January. Practically speaking, an indecisive Fed
would have to worry that even a modest retreat in the data could lead to more confusion
around the timing of the next taper. The best way to address this concern would be to
show a strong “tapering bent” in the statement and press conference that immunizes the
Fed against potential noise in the data and leaves the market with the baseline
expectation of a January tapering.
This suggests two plausible outcomes for this FOMC:
1) Tapering with “enhanced guidance.” There are many potential nuances here but we
generally think the FX market has room to re-price on the indication that the Fed is
beginning to lean in a different direction. The USD rates market reaction will depend
importantly on the details with the recently well-anchored 2-5y sector serving as a
referendum on guidance and the long-end reacting to the initial size and suggested or
inferred pace of reductions.
2) No taper yet but a strong bias to do so in January. The statement, and especially the
press conference, would need to highlight the observed strength in the data and
present an optimistic outlook. An “upbeat” Fed would guide the market to a January
taper even in the event of a minor wobble in the data. We think this outturn could
potentially be just as bullish for the dollar with less nuance to parse.
18 December 2013
FX Compass: The Final Countdown 4
The risk case to a USD bullish view would be a non-taper with “enhance guidance”. We
see this as a low probability outcome. The market expects the Fed to introduce stronger
guidance in the event of a tapering. If the Fed were to first strengthen the guidance before
tapering later, it would be furnishing a net easing now before delivering a net tightening
later. This would tend to confuse market participants while introducing unnecessary
volatility. There is no reason for the Fed to net ease at this meeting and so we see the risk
of stronger guidance in the absence of taper as very low. We agree with the market
consensus that enhanced guidance will come concurrently with an LSAP reduction.
In our base case tapering scenario the FX market is likely to be volatile at first as the
implications of LSAP reductions, guidance on further reductions, the form of stronger
guidance and the nuances of the forty-five minute press conference are digested. On a
non-taper, the read-through could be a bit more straightforward in the sense that policy
action is delayed but the statement and press conference are honed as to deliver a
message that is on net less dovish than in the recent past.
We favor sticking with core thematic dollar bullish trades that should work against a
backdrop of shifting Fed policy even if they might experience some short-term volatility.
In particular we look to dollar pairs where the other central bank is biased to deliver more
easing relative to a Fed that is beginning the process of backing away from its
extraordinary policy measures. Here the two standouts remain AUDUSD (lower) and
USDJPY (higher).
We reiterate our trades on both from the year-ahead piece as detailed below.
18 December 2013
FX Compass: The Final Countdown 5
Short AUDUSD We re-iterate the following trades from our year-ahead piece:
- AUDUSD digital puts
- 1y AUDUSD puts financed by selling AUDJPY puts
- EURUSD lower, EURAUD higher dual digital
In particular, for AUDUSD downside we continue to favor digital puts and/or put spreads.
USD-G10 implied vols have in general risen above what realized volatility would suggest,
but AUDUSD is an exception with implied vol delivering while a further downside in spot
should keep vol elevated, in our view. Additionally, on our comparative metrics, AUD
stands out with the combination of delivering vol and high 10D/25D put vol ratio.
Exhibit 3: G10 implied Vol not delivering in general (even though the rising monetary policy divergence should keep it supported)
Exhibit 4: AUDUSD vol delivering and steep skew supports digital put or put spread strategies
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
Jan-13 Apr-13 Jul-13 Oct-13
1m USD-G10ATM ImpliedVol
1m USD-G10Realized Vol
JPY
GBP
CHF
EUR
SEK
CAD
NOKNZD
AUD
1.02
1.04
1.06
1.08
1.10
1.12
1.14
1.16
-1% 0% 1% 2% 3% 4% 5%
10
D/2
5D
Pu
t V
ol ra
tio
3m Implied - 1m Historical
Long Vol, short skew strategies
Source: Credit Suisse Locus (calculated as simple average) Source: Credit Suisse Locus
Separately, we note the recent flattening of the implied vol curve, but steepening of the
skew curve would suggest more favorable risk reward on longer dated strategies – and
that’s in fact the horizon at which we are most confident the structural story would play out
(see here). For instance, one-year 0.79 digital put is currently offered for 14% of the AUD
notional (spot ref. 0.8939), providing leverage of 7:1 with risk limited to premium paid.
Exhibit 5: 1y Vol adjusted RR near its lowest levels
-0.36
-0.34
-0.32
-0.30
-0.28
-0.26
-0.24
-0.22
-0.20
-0.18
-0.16
Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13
6m 25d RR/Vol
3m 25d RR/Vol
1y 25d RR/Vol
Source: Credit Suisse Locus
18 December 2013
FX Compass: The Final Countdown 6
Long USDJPY We reiterate the following trades from our year ahead piece:
- 2m USDJPY calls
- USDJPY RKI risk reversals (buying USDJPY call)
- EURUSD lower, EURJPY higher correlation structures
Fed’s Taper is the immediate event to focus on, but importantly our economist base case
is for the Bank of Japan to deliver more easing already in February.
Our economists expect the government and central bank to issue a new Joint
Statement of the Government and the Bank of Japan on Overcoming Deflation and
Achieving Sustainable Economic Growth at the BoJ's January monetary policy
meeting paving the way of an announcement of additional easing measures in
February (see here for details).
This motivates us to re-iterate our 2m USDJPY call recommendation. While vol has re-
risen to some extent (and it is not delivering), we would expect it to remain supported
through the above key events. The two-month horizon would cover the BoJ meeting on 18
February. Indicatively a two-month 107 USDJPY call is currently offered for 0.40% of the
USD notional (spot ref. 102.97). Risk is limited to the premium paid.
Separately, we continue to favor RKI risk reversals as an efficient way to cheapen
USDJPY upside. Specifically, a three month 106 USDJPY call financed by selling a 100
USDJPY put which only knocks-in at 94 is indicatively offered at 0.27% of the USD
notional (spot ref.102.97), close to 70% discount to the vanilla call. The risk on the trade is
potentially unlimited the further USDJPY trades below 100 if the short put legs get
triggered during the life of the option. However, USDJPY has not traded at 94 since the
BoJ decision in April.
Exhibit 6: Put skew has risen Exhibit 7: Downside skew is excessive compared to spot/vol correlation
9.5%
9.7%
9.9%
10.1%
10.3%
10.5%
10.7%
10.9%
11.1%
11.3%
11.5%
10d P 25d P ATM 25d C 10d C
Current
20-day ago
AUDUSD
AUDCAD
NZDJPY AUDJPY
EURUSD CADJPY
GBPUSD
EURGBP
GBPJPY
EURJPY CHFJPY
GBPCAD
USDNOK
GBPCHF
EURCAD
USDCHF
USDSEK
EURCHF
GBPAUD
EURAUD
EURNOK EURSEK
USDCAD
USDJPY
-0.25
-0.20
-0.15
-0.10
-0.05
0.00
0.05
0.10
0.15
0.20
0.25
-1 -0.5 0 0.5 1
3m
25
d R
R/V
ol
Spot-Implied Vol correl, 3m
NZDUSD
Source: Credit Suisse Locus Source: Credit Suisse Locus
18 December 2013
FX Compass: The Final Countdown 7
Long USD/EM Within EM, we recommend this week USD longs funded against ZAR, TRY and SGD
(please see our year ahead outlook for more EM trade ideas which we expect to work in a
USD bullish environment).
Buy 1m USDSGD call
We recommend buying a one-month USDSGD 1.270 call, indicatively offered at 0.24% of
USD notional (spot ref. 1.2550). SGD vol is relatively low within its range and the positive
spot-vol correlation works in favor of the trade (Exhibits 8 & 9). Although vol is not
delivering, we think it is likely to stay supported given major Fed event risks. The
maximum loss to the trade is limited to the premium paid.
Exhibit 8: SGD vol relatively cheap in its range Exhibit 9: Positive spot-vol correlation
Percentile against 2 year range
CNY
IDR
INR
KRW
MYR
PHP
SGD
THB
TWD
CZK
HUF
PLN
BRL
ILS
MXN
ZAR
TRY
RUB
0%
2%
4%
6%
8%
10%
12%
14%
16%
0.00 0.20 0.40 0.60 0.80 1.00
1m
im
plie
d v
ol le
ve
l
1m implied vol percentile
1.20
1.22
1.24
1.26
1.28
1.30
1.32
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
Dec-11 Aug-12 Apr-13 Dec-13
USDSGD 1m vol
USDSGD (RHS)
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service
We see limited upside potential for the SGD Nominal Effective Exchange Rate (NEER)
from current level over the horizon of the trade. We estimate that the NEER is already at
0.8% above the middle of its policy band which centered around a 2.5% annualized slope
with a +/-1.5% bandwidth (Exhibit 10). We believe the MAS has intervened when the
NEER rose to 1% above the midpoint earlier this year.
Recent Singapore economic data have surprised to the downside and could add to
negative SGD sentiment. Both October IP and retail sales were weaker than expected.
November exports fell sharply, contracting 8.8%yoy against consensus for a 4.3%yoy rise.
Electronic exports in particular fell 8.9%yoy. Exhibit 11 shows that Singapore’s electronic
exports have clearly underperformed other countries in the region in recent years,
suggesting that the high exchange rate is having an impact on the sector’s
competitiveness.
18 December 2013
FX Compass: The Final Countdown 8
Exhibit 10: SGDNEER is relatively close to the top of its policy band
Exhibit 11: SGD electronic exports continue to underperform
110
112
114
116
118
120
122
124
126
Apr 11 Aug 12 Dec 13
SGD NEER
SGD NEER forwards
50
70
90
110
130
05 06 07 08 09 10 11 12 13
Electronic Exports (Index 2010 = 100) USD terms: 6 month moving average
KR MY SG
TW TH
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Source: Credit Suisse, CEIC
Buy 2m USDTRY RKO calls
We remain bearish on the Turkish Lira – it is the continuing imbalances combined with the
higher global interest rate structure that lead us to expect further gradual upside in
USDTRY. For the near-term horizon an early taper decision remains a catalyst for further
weakness.
Yet fast depreciation remains unlikely – recent more hawkish CBRT steps illustrate that
(see here). We do not envisage these steps to run too far. After all growth has slowed
substantially, it is an important election year and the inflation dynamic is set to improve in
the near future (see here for a more detailed discussion). But these steps should be
sufficient to prevent a panic or fast sell-off.
The steepness of the skew combined with our expectation the central bank will be
depressing volatility allows us yet again to express our bearish view via USDTRY call
RKOs. For instance a 2m 2.08 USDTRY call with an RKO set at 2.20 is currently offered
for 0.45% of the USD notional (spot ref 2.0409), about 80% discount to a vanilla call. The
maximum leverage on the trade is 12x, while risk is limited to premium paid.
Exhibit 12: Vol-adjusted skew richest in EM… Exhibit 13: … and back to its highs
0.10
0.15
0.20
0.25
0.30
0.35
0.40
0.45
EU
RR
UB
US
DR
UB
US
DP
LN
US
DIL
S
US
DM
YR
US
DH
UF
US
DIN
R
EU
RP
LN
US
DZ
AR
US
DB
RL
US
DM
XN
US
DID
R
EU
RH
UF
EU
RT
RY
US
DC
ZK
US
DK
RW
US
DS
GD
US
DT
RY
Current 25d RR/Vol
Average over past 2y
0.15
0.20
0.25
0.30
0.35
0.40
0.45
Dec-10 Oct-11 Aug-12 Jun-13
3m USDTRYrisk adjusted25d RR
Source: Credit Suisse Locus, 3m horizon Source: Credit Suisse Locus
18 December 2013
FX Compass: The Final Countdown 9
Buy 2m USDZAR RKO calls
We recommend buying a two-month USDZAR 10.50 call 11.20 RKO, indicatively offered
at 0.60% of notional (spot ref. 10.34). The trade benefits from the steep pricing of the skew
curve, and offers a maximum payout of 10.4: to 1. The maximum loss to this trade is
limited to the upfront premium.
The rationale behind the trade is that ZAR appears to be most exposed to the possibility of
Fed tapering (Exhibit 14). While our bearish take on the ZAR has been repeatedly
highlighted in the past few months (most recently here), we believe it compares
unfavorably even to other risk-sensitive high-beta currencies and that it could cause ZAR
to underperform further in coming weeks.
Exhibit 14: ZAR extremely sensitive to tapering concerns
Exhibit 15: Portfolio flows have reversed sharply, ZAR has yet to catch up
Daily change on days the US 10y moved up 4bps+ (50 observations YTD)
-0.6%
-0.5%
-0.4%
-0.3%
-0.2%
-0.1%
0.0%
0.1%
ZA
R
BR
L
MX
N
TR
Y
HU
F
PL
N
CZ
K
INR
IDR
CL
P
SG
D
TH
B
ILS
MY
R
RU
B
CO
P
KR
W
TW
D
PH
P
CN
Y
-35%
-25%
-15%
-5%
5%
15%
(200)
(100)
0
100
200
300
400
500
Jun-11 Jan-12 Aug-12 Mar-13 Oct-13
Non-Resident Portfolio Flows (3mma USD mn)
ZAR 6m Performance (right)
Source: Credit Suisse , the BLOOMBERG PROFESSIONAL™ service Source: Credit Suisse , JSE
In particular, we note that the other two currencies that have shown high negative
correlation to US yields, namely BRL and MXN, could benefit from potential
idiosyncratic support factors. In the case of MXN, we think the recently approved
energy reform could provide some support to existing positions. As for Brazil, we see
the risk that authorities could introduce a more aggressive-than-expected intervention
program in the coming days.
The balance of idiosyncratic drivers remains negative in the case of South Africa. First, our
call for a significant widening in the current account deficit (we expect -8.3% of GDP in
2014) is particularly worrisome in the light of the recent pullback in non-resident portfolio
flows (Exhibit 15).
Second, the recent data releases show signs of further deterioration on the activity front,
with vehicle sales falling from -2.9%yoy to -4.6%yoy in November, Q3 GDP slowing down
from 3.2%qoq annualized in Q2 to 0.7%, stagnant imports and a particularly weak surprise
in the monthly budget deficit data in October. This underscores our view that a rating
downgrade is likely in 2014.
Finally, political risk remains high, with general elections taking place in April, and
increasingly strong signs of discontent for President Zuma from his core constituency
within the ANC party.
18 December 2013
FX Compass: The Final Countdown 10
Technical Analysis: AUD and JPY Are Expected To Weaken Further Into Q1 2014 A weaker AUD has been one of core themes and trades for this year and this trend is
expected to extend into Q1 2014. AUDUSD has extended its sell-off is now approaching
our next downside support target at .8848, which marks the low for the year. We would
expect a fresh attempt to hold in here and allow for a corrective bounce from it. However,
we remain firmly bearish and look for break below it to see a fresh bear phase down to
the lower end of the multi-year bear channel at .8738. With the 38.2% retracement of the
entire 2001/2011 bull move just below at .8675 we would expect a fresh basing effort into
this support zone. Direct extension through .8675 would signal a more extended bearish
phase to half the 2008/2011 move higher at .8546 then .8066/.7948.
A weaker JPY has also been another key theme for us in 2013. USDJPY is now at a
critical juncture as it has rallied to test key long-term resistance at 103.10/74. This marks
not only the former price higher for the year, but also the first major retracement (38.2%) of
the 1998/2011 fall. Given the significance of this level it is not surprising to see an initial
hold beneath here. We allow for this area to cap further and even to see a retracement
back from it. However, our bias is still for an eventual break above here to challenge the
61.8% retracement of the 2008/2011 fall at 105.60 above which finds a tougher test at
110.60/111.60. This marks half the 1998//2011 fall and the 2008 peak and we would look
for a cap here.
Exhibit 16: AUDUSD - weekly Exhibit 17: USDJPY – monthly
w
Source: CQG, Credit Suisse Source: CQG, Credit Suisse
David Sneddon
+44 20 7888 7173
Christopher Hine
212 538 5727
18 December 2013
FX Compass: The Final Countdown 11
Portfolio Updates
Exhibit 18: Open Positions in Cash Recommendations Portfolio
Date Opened Trade Details Notional Units Spot Reference Forward Take Profit Stop Loss % Gain P&L in USD
25-Sep-13 Long USDPHP 3m NDF 1 43.43 43.00 44.50 43.9 2.65% 264,886
09-Oct-13 Long GBPNOK 1 9.59 9.65 10.45 9.75 3.04% 303,858
05-Nov-13 Long GBPSEK 1 10.47 10.49 11.25 10.45 1.68% 168,132
12-Nov-13 Long USDTRY 1 2.05 2.09 2.15 2.00 -1.57% (156,863)
Unrealized P&L 580,012
Realized P&L 2013 (1,011,625)
Total P&L 2013 YTD (431,612)
Gainers/Total 2013 39%
Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at the original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments may be subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. The P&L results shown do not include relevant costs, such as commissions, interest charges, or other applicable expenses. Source: Credit Suisse
Exhibit 19: Derivatives Trade Recommendations Update – Active Positions
For full table including closed trades, please see Locus Trade Tracker
Date Opened Trade Details Entry Cost
Current alue
P&L (as % of Notional)
Notional (in USD)
P&L (in USD) Comments
17-Dec-13 2m USDZAR RKO call 0.60% 0.60% 0.00% 100,000,000 0 Open
17-Dec-13 2m USDTRY RKO call 0.45% 0.45% 0.00% 100,000,000 0 Open
17-Dec-13 1m USDSGD call 0.23% 0.23% 0.00% 100,000,000 0 Open
10-Dec-13 Buy 6m EURUSD puts, sell 6m10y US swaption payers 0.00% -0.08% -0.08% 1,000,000 -74,959 Hold
3-Dec-13 3m EURAUD higher; EURUSD lower dual digital 10.00% 9.75% -0.25% 1,000,000 -2,530 Hold
3-Dec-13 3m USDJPY higher; GBPUSD higher dual digital 10.00% 9.80% -0.20% 1,000,000 -2,000 Hold
26-Nov-13 2m USDJPY call 0.45% 0.55% 0.10% 100,000,000 95,150 Hold
26-Nov-13 1y USDBRL seagull 0.30% 0.62% 0.32% 100,000,000 316,650 Hold
26-Nov-13 1y1y USDRUB FVA 12.00% 11.92% -0.08% 10,000 -800 Hold
30-Oct-13 3m CADMXN 1x2 put spread 0.64% 0.75% 0.11% 100,000,000 111,921 Hold
23-Oct-13 6m EURUSD digital put 12.50% 10.41% -2.09% 1,000,000 -20,885 Hold
23-Oct-13 6m AUDUSD digital put 15.00% 51.16% 36.16% 1,000,000 334,268 Hold
25-Sep-13 3m USDTRY RKO call 0.40% 0.37% -0.03% 100,000,000 -26,250 Hold
25-Sep-13 6m USDBRL RKO call 1.00% 1.66% 0.66% 100,000,000 655,000 Hold
19-Sep-13 3m EURJPY RKI 1x2x1 call butterfly 0.54% 2.02% 1.48% 100,000,000 1,500,233 Hold
9-Apr-13 2y USDJPY call 1.83% 0.82% -1.01% 100,000,000 -1,010,155 Hold
9-Apr-13 2y zero cost USDJPY RKI risk reversal 0.00% 0.24% 0.24% 100,000,000 242,025 Hold
22-Jan-13 1y USDJPY 2x1 RKI call spread 1.06% 5.25% 4.19% 100,000,000 4,193,750 Hold
22-Jan-13 1y EURCHF risk reversal (long call) 0.21% 0.02% -0.19% 100,000,000 -194,428 Hold
Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at the original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments may be subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. The P&L results shown do not include relevant costs, such as commissions, interest charges, or other applicable expenses. Source: Credit Suisse
18 December 2013
FX Compass: The Final Countdown 12
FX Forecast Summary
Major Currencies1 vs. Spot
17 Dec 2013
Forecasts
Comments 3m 12m
US Dollar TWI 86.30 90.70 95.99 Bullish. With tapering likely to come back into focus in early 2014, we
expect many EM currencies to remain under pressure, as the excesses of
the unprecedented period of record low US interest rates begin to reveal
themselves. The much softer-than-expected euro area inflation print and
expectations for a more dovish ECB have caused us to turn more bearish
on EURUSD. In addition, the USD should retain its upward momentum
against the JPY and AUD over the medium term.
by market convention EUR 1.377 1.310 1.240
JPY 102.8 110.0 120.0
GBP 1.643 1.607 1.550
CHF 0.886 0.939 0.984
AUD 0.915 0.850 0.800
CAD 1.063 1.100 1.130
SEK 6.529 6.947 7.419
Euro TWI 97.5 95.8 94.37 Bearish. Following the 7 November refi rate cut we anticipate a continued
dovish ECB, with risks of further rate cuts should activity data disappoint or
inflation not bounce back from its low level. Combined with the renewed
focus on the looming Fed taper, the euro should head down against the
dollar.
foreign currency units per
euro
USD 1.377 1.310 1.240
JPY 141.5 144.1 148.8
GBP 0.838 0.815 0.800
CHF 1.219 1.230 1.220
AUD 1.505 1.541 1.550
CAD 1.463 1.441 1.401
SEK 8.988 9.100 9.200
Japanese Yen TWI 135.7 129.6 121.7 Bearish. In the near term the yen is vulnerable to the possibility of an early
December taper and the risk of additional positive US data surprises. In this
scenario December could see material weakness for the yen, as it
continues on the downwards trend seen during the past few weeks.
Furthermore, the expectation for the BoJ to further ease in January adds to
our bearish near-term forecast. In the longer term we believe the Japanese
economy needs a weaker currency, and expect policy divergence to
continue widening in 2014 to take USDJPY to our 12-month forecast of 120.
yen per unit foreign
currency
USD 102.8 110.0 120.0
EUR 141.5 144.1 148.8
GBP 168.9 176.8 186.0
CHF 116.03 117.15 121.97
AUD 93.99 93.50 96.00
CAD 96.7 100.0 106.19
SEK 15.74 15.84 16.17
UK Sterling TWI 83.82 85.66 86.72 Mixed. Continued strong UK data and falling unemployment support GBP
versus the euro and the Scandis, although a dovish BoE may provide some
offset. But cable is likely to retrace as part of the anticipated general dollar
strength.
foreign currency units per
pound
USD 1.643 1.607 1.550
EUR 1.193 1.227 1.250
JPY 168.9 176.8 186.0
CHF 1.455 1.509 1.525
AUD 1.796 1.891 1.938
CAD 1.746 1.768 1.752
SEK 10.73 11.17 11.50
Swiss Franc TWI 146.6 144.5 145.1 Neutral. We expect little change in EURCHF in the near term but see some
potential for CHF depreciation further out given the SNB’s likely continued
dovish-ness and limited drag from the unwind of 'safe–haven' flows.
However this is counteracted by improving Swiss growth prospects, strong
current account surplus flows, and the risk of ECB continuing its dovish
stance if euro area prospects further deteriorate.
francs per unit foreign
currency (per 100 units
for JPY and SEK)
USD 0.886 0.939 0.984
EUR 1.219 1.230 1.220
JPY 0.862 0.854 0.820
GBP 1.455 1.509 1.525
AUD 0.810 0.798 0.787
CAD 0.834 0.854 0.871
SEK 13.57 13.52 13.26
1 Major currencies, defined and ranked by order of their reported foreign exchange market turnover from the BIS 2004 Triennial
Central Bank Survey.
18 December 2013
FX Compass: The Final Countdown 13
Regional Currencies vs.
Spot
17 Dec 2013
Forecasts
Comments 3m 12m
Americas
Brazilian Real USD 2.308 2.400 2.580 Bearish. The deterioration in Brazil's fiscal accounts exposes the credit to a
downgrade risk. Furthermore, we think the currency remains vulnerable to Fed
tapering. Finally, we think political risk will rise ahead of the October election.
Canadian Dollar TWI 107.2 104.5 103.0 Bearish. Monetary policy divergence between Canada/US has widened.
Should data remain soft, we think markets would start pricing in a more dovish
policy stance. Lastly, the shift in the US energy sector is proving very
challenging for the Canadian economy.
USD 1.063 1.100 1.130
Mexican Peso USD 12.86 13.10 12.60 Medium-Term Bullish. Structural reform progress, especially in the energy
sector could lead to a significant pickup in FDI flows. In addition, the low/high
gearing towards the US makes the peso better positioned than the rest of EM.
Colombian Peso USD 1931 1950 1980 Neutral. Our expectations of strong FDI inflows suggest that COP is less likely
to suffer from the deterioration in funding conditions otherwise expected for
emerging markets.
Chilean Peso USD 530.3 540.0 545.0 Bearish. We expect further central bank easing in combination with Chile’s
poor basic balance and gearing towards China to continue to weigh on the
peso.
Pacific
Australian Dollar USD* 0.915 0.850 0.800 Bearish. With the RBA rejoining the global “race to the bottom,” and mining
investment likely to peak this year, we think AUD is likely to come under
pressure as the Australian economy rebalances. JPY* 93.99 93.50 96.00
NZD* 1.100 1.090 1.070
NZ Dollar USD* 0.832 0.780 0.748 Mixed. We expect NZD to outperform AUD but lose ground against USD in a
broad USD strength environment. We see modest scope for interest rate
spreads to move further in NZD favor. In addition, further support for NZD in
2014 will likely come from increased migration flows, and a boost in dairy
exports following China’s easing of its one-child policy.
JPY* 85.47 85.78 89.72
Scandinavia
Swedish Krona EUR 8.998 9.100 9.200 Bearish. The recovery is underway but slowly. Low price pressures and
macroprudential measures should keep Riksbank dovish for an extended
period. Weaker FX would be welcome but the current account surplus is
high and flow support may delay such an adjustment.
USD 6.529 6.947 7.419
Norwegian Krone EUR 8.414 8.450 8.600 Bearish. The outlook for weaker investment growth, cooling household
consumption and falling house prices are key concerns. Reliance on non-
core exports may require further currency depreciation. Meanwhile, Norges
Bank is likely to remain dovish for a prolonged period.
USD 6.112 6.450 6.935
SEK* 1.068 1.077 1.070
Emerging Europe, Middle East and Africa
Czech Koruna EUR 27.44 27.50 28.00 Neutral. At this moment a period of wait-and-see is likely, but we expect
deflationary pressure to require further steps and possibly increase of the
floor further down the line. In the meantime, CZK is likely to play the role of
a funding currency for the region.
Hungarian Forint EUR 300.9 305.0 310.0 Bearish. We see increasing risk of further dovish innovations from the
central bank including possibly an extension of the FGS scheme. The
easing steps so far have substantially reduced front end carry leaving HUF
more vulnerable to risk-off periods.
Polish Zloty EUR 4.18 4.15 4.10 Bullish. Growth pick-up, non-dovish central bank, and cheap valuation
leave us bullish on PLN. The pension reform may be an obstacle to gains,
but we recommend buying on any such related PLN dips.
Israeli Shekel USD 3.49 3.55 3.55 Neutral. The potential for appreciation has fallen, and we expect two further
rate cuts in 2014. Risks for capital control measures and resident outflow
incentives also remain open, and the M&A support is now dwindling.
18 December 2013
FX Compass: The Final Countdown 14
Regional Currencies vs.
Spot
17 Dec 2013
Forecasts
Comments 3m 12m
Russian Rouble Basket 38.2 39.0 40.5 Bearish. Structural growth weakness and the high fiscal deficit suggest
Russia needs a weaker RUB over time. Recent changes to the intervention
mechanism and shift to free float increasingly enable such a trend. Rouble versus basket: USD 32.7 34.2 36.6
.55*USD+.45*EUR EUR 45.0 44.8 45.3
South African Rand USD 10.34 10.60 11.00 Bearish: Further deterioration in both the balance of payments and in the
fiscal numbers are likely, in our view, opening the door to credit rating
downgrades. With elections looming, the potential for political risk is high. EUR 14.23 13.89 13.64
Turkish Lira Basket 2.41 2.50 2.55 Bearish. The large current account deficit as well as the growth focus of the
central bank leave lira vulnerable to further weakness in the current
environment, in our view. A renewed push higher in US yields may be a
catalyst.
Lira versus basket: USD 2.03 2.16 2.28
.50*USD+.50*EUR EUR 2.79 2.84 2.82
Asia
Chinese Renminbi USD 6.07 6.10 6.07 Bullish. China’s BoP surplus has risen sharply and its trade surplus with
the US has hit a record level. We continue to expect the government to
widen the trading bands for spot around the fix from the current 1% per side
to 1.5%–2.0% in the next several months.
Indian Rupee USD 61.0 62.0 65.5 Tactically Bullish. We expect positive seasonality in India’s current
account balance in Q1 to combine with improving economic growth and
now stronger external liquidity to lead the INR to outperform in Q1..
Indonesian Rupiah USD 11920 12200 12350 Bearish. Monetary policy still appears to us to be a bit too loose for IDR
stability and Bank Indonesia (BI) does not plan to tighten further.
Korean Won USD 1052 1075 1100 Neutral. Korea’s current account surplus should weaken seasonally in Q1.
Additionally, the rise in USDJPY we expect is likely to lead to capital
outflows from Korea..
Malaysian Ringgit USD 3.21 3.28 3.35 Bearish. MYR will likely underperform in a broad USD strength
environment we expect. While the current account has stabilized, MYR
remains vulnerable to capital outflow given large foreign overweight in its
local debt market.
Philippines Peso USD 44.3 44.3 44.5 Bearish. Negative carry and central bank resistance to currency
appreciation make PHP an ideal funding currency for the region, in our
view. We expect current account to deteriorate in 2014 as domestic
demand picks up and reconstruction begins post the recent typhoon.
Singapore Dollar USD 1.249 1.275 1.295 Neutral. We expect Singapore’s central bank (MAS) to maintain the current
appreciation path for the SGD nominal effective exchange rate. We
estimate the appreciation slope to be 2.5%pa with 1.5% bands on either
side of the center of the bands.
Taiwan Dollar USD 29.60 29.80 29.90 Neutral/Bearish. Taiwan’s central bank should continue to manage
volatility on both sides. Our forecasts imply the TWD will outperform KRW
slightly.
Thai Baht USD 32.07 32.80 33.20 Moderately Bearish. Political uncertainty is likely to persist in the months
ahead. Portfolio outflows have started rising and the current account
remains insufficient to support the THB in the near term. Given THB REER
remains expensive despite recent correction, with downside risk to growth
and low inflation, the BoT will likely prefer a weaker THB, in our view.
Exchange rates are home currency per foreign currency unit, unless indicated by * (= inverse quotation). Source: Credit Suisse
GLOBAL FIXED INCOME AND ECONOMICS RESEARCH
Ric Deverell Eric Miller,
Global Head of Product Research Co-Head, Securities Research & Analytics +44 20 7883 2523 +1 212 538 6480
[email protected] [email protected]
MACRO PRODUCT RESEARCH
EMEA MACRO PRODUCT
Helen Haworth Head of EMEA Macro Product +44 20 7888 0757 [email protected]
COMMODITIES
Tom Kendall Marcus Garvey Bhaveer Shah +44 20 7883 2432 +44 20 7883 4787 +44 20 7883 1449 [email protected] [email protected] [email protected]
FX STRATEGY
Mark Astley Anezka Christovova Bhaveer Shah +44 20 7883 9931 +44 20 7888 6635 +44 20 7883 1449 [email protected] [email protected] [email protected]
EU RATES EM RATES
Panos Giannopoulos Thushka Maharaj Florian Weber Shahzad Hasan +44 20 7883 6947 +44 20 7883 0211 +44 20 7888 3779 +44 20 7883 1184 [email protected] [email protected] [email protected] [email protected]
Adam Dent Marion Pelata Nimrod Mevorach +44 20 7883 7455 +44 20 7883 1333 +44 20 7888 1257 [email protected] marion.pelata @credit-suisse.com [email protected]
US MACRO PRODUCT
Carl Lantz Head of US Macro Product +1 212 538 5081 [email protected]
COMMODITIES
Jan Stuart Stefan Revielle Johannes Van Der Tuin +1 212 325 1013 +1 212 538 6802 +1 212 325 4556 [email protected] [email protected] [email protected]
FX STRATEGY
Alvise Marino Matthew Derr +1 212 325 5911 +1 212 538 2163 [email protected] [email protected]
US RATES
Ira Jersey Michael Chang Carlos Pro William Marshall +1 212 325 4674 +1 212 325 1962 +1 212 538 1863 +1 212 325 5584 [email protected] [email protected] [email protected] [email protected]
APAC MACRO PRODUCT
Ray Farris Head of APAC Macro Product +65 6212 3412 [email protected]
COMMODITIES ASIA MACRO STRATEGY JAPAN RATES NJA RATES
Andrew Shaw Trang Thuy Le Tomohiro Miyasaka (Japan) Ashish Agrawal +65 6212 4244 +65 6212 4260 + 81 3 4550 7171 +65 6212 3405 [email protected] [email protected] [email protected] [email protected]
Disclosure Appendix
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Emerging Markets Bond Recommendation Definitions Buy: Indicates a recommended buy on our expectation that the issue will deliver a return higher than the risk-free rate. Sell: Indicates a recommended sell on our expectation that the issue will deliver a return lower than the risk-free rate.
Corporate Bond Fundamental Recommendation Definitions Buy: Indicates a recommended buy on our expectation that the issue will be a top performer in its sector. Outperform: Indicates an above-average total return performer within its sector. Bonds in this category have stable or improving credit profiles and are undervalued, or they may be weaker credits that, we believe, are cheap relative to the sector and are expected to outperform on a total-return basis. These bonds may possess price risk in a volatile environment. Market Perform: Indicates a bond that is expected to return average performance in its sector. Underperform: Indicates a below-average total-return performer within its sector. Bonds in this category have weak or worsening credit trends, or they may be stable credits that, we believe, are overvalued or rich relative to the sector. Sell: Indicates a recommended sell on the expectation that the issue will be among the poor performers in its sector. Restricted: In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated: Credit Suisse Global Credit Research or Global Leveraged Finance Research covers the issuer but currently does not offer an investment view on the subject issue. Not Covered: Neither Credit Suisse Global Credit Research nor Global Leveraged Finance Research covers the issuer or offers an investment view on the issuer or any securities related to it. Any communication from Research on securities or companies that Credit Suisse does not cover is a reasonable, non-material deduction based on an analysis of publicly available information.
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Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.