– The theme of a “more-nuanced” USD decline starts to work
We initiated a new approach to the USD in last week’s FX Quarterly publication, arguing that the USD is likely to remain strong against low-yielding currencies (JPY, CHF and GBP) but that is should weaken versus the commodity bloc and the EUR. The unexpected fall (although forecast by our economists) in US consumer confidence and new home sales has no doubt boosted expectations that Fed QE3 will last for longer. Accordingly, the usual market response ensues – higher equities, lower US treasury yields and a weaker USD, especially against the commodity bloc. We forecast rallies in AUD, NZD and CAD against the USD, expecting all these currencies to trade very close to their respective highs this year. Currently, our favoured trade recommendation is short USDCAD. We entered this trade at 1.0270, target 0.9935 with a stop at 1.0.425. USDCAD has traded to a new cycle low at 1.0175 and we clearly look for this pair to move even lower. Key drivers for this trade include: US-Canadian 2-year swap spreads point to a far lower USDCAD (see chart) while oil prices signal CAD appreciation too. FX positioning also plays very well for this pair to move lower. Our own BNP Paribas Positioning Indicator suggests that the largest FX long is the USD and the largest short is CAD. Given our view that USDCAD should fall, the extreme positioning surrounding these currencies has the potential to strengthen the move. In the North American session today, we have the release of US pending home sales for February that our economist forecast to decline by 1.0% MoM vs a consensus of +1.3% MoM. We also expect Canadian CPI for
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