Trading Spread Trends
Market developments in recent weeks suggest the best FX trends in G10 have ended for now. USDJPY is accident-prone, the post-OMT euro rally is also done while a secular dollar bull run might have to wait until the Fed offers more clarity. As such, once calm returns we suspect relative value trades will prevail on a tactical basis. For the majors however, effective zero interest rate policy renders it difficult to realise FX changes based on yield differentials – the ‘cleanest’ way to express relative value. Within the minors though, clear divergences are coming through in the likes of NOKSEK and AUDNZD. For such pairs despite policy rates hitting lower bounds, they remain at high enough absolute levels to provide discernible spreads. We note that the correlations between FX performance and spread trends are not static, but this is helpful in differentiating risk: reward of particular trades.
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