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FX FUNDAMENTAL ANALYSIS % Gain / Loss Vs. USD since 1st March 2013


0.00 0.02 0.04 0.06 0.08


-15 AUD CAD JPY -10 -5 0 Spot return Chart 1 : GBP the winner year on year Source: Commerzbank Research, Bloomberg LP


above 1% by the end of 2015. Rate profiles moved substantially in favour of the USD, in particular shorter term 2 year rates.


It is this dynamic that investors will have to pay more


attention NOK SEK CHF


EUR DKK 5


GBP 1.40 10 Jan-13 Jun-13 GBP-USD (LHS) Chart 2 : Swap spreads move south


Given that risk aversion remains low this means that the primary driver of GBP-USD should lie with shorter term rate spreads in


Nov-13 Apr-14 Swap spread Source: Commerzbank Research, Bloomberg LP


to in the coming months. Both the BoE and the Fed are intent on normalizing their respective monetary policies via tapering (and forward guidance) in the case of the Fed and via forward guidance policies in the case of the BoE. What is clear is that the drivers of exchange rates in the past few years will no longer be sufficient to explain future moves as the respective central banks move away from ultra loose policy towards a more orthodox policy setting.


16 FX TRADER MAGAZINE April - June 2014


The drivers of exchange rates in the past few years will no longer be sufficient to explain future moves as the respective central banks move away from ultra loose policy towards


a more orthodox policy


the short to medium term. From now on, it’s all about 2 year rate spreads.


So what is the best way to express sterling longs? Given that both the USD and to an extent GBP still trade at relatively cheap levels, the trick for investors is to avoid GBP longs against the USD altogether. Rather short EUR-GBP probably offers the


setting


best risk reward profile, in large part because any significant USD move will likely drag EUR-USD lower meaning EUR- GBP won’t be too far behind. The problem for investors is that shorting the EUR in a broad sense has so far proved to be a one way ticket to the trader’s g ra v e y ar d .


Perhaps the best manner of doing


this is by selling risk


reversals, which at present are only marginally skewed towards puts. We know that the ECB are increasingly intolerant of a much stronger EUR, therefore selling risk reversals is a comparatively cheap way of expressing a long sterling view.


Peter Kinsella NZD


GBP-USD spot, UK - US 2 year swap spread in % 1.70


1.60 1.50


0.1 0.2 0.3 0.4 0.5 0.6


Interest return


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