Although the dollar index remains within its trading range of the last two months, FX has hardly been dull on a pair-wise basis. Over the past month European currencies like EUR, CHF and GBP have peaked; some of this year’s most unloved pairs like RUB, CLP and CAD retraced losses; and some of 2014’s best performers like INR, TRY and NOK stacked on further gains. It may seem like there is nothing to do in a 6-vol market where rates and FX turnover is the lowest in years, but there are quite a few opportunities in cash and options grouped around three themes: (1) earning what’s left of risk premia; (2) scaling into cheap, defensive hedges; and (3) exploiting themes with low correlation to market volatility. We outline the pair-wise opportunities in each category.
Macro Trade Recommendations: Positioning for higher UST yields through the dollar is an exercise in extreme patience, maybe even futility – USD/CAD was stopped, though a bearish NZD/USD risk reversal remains the right trade for a less hasty RBNZ. Add short GBP/JPY to an existing short in GBP/NOK on positions and inconveniently low inflation. Position for a Scottish risk premium through a one-touch calendar spread in cable. Stay long NOK (EUR, SEK), but sell a 1-mo 1.12 NOK/SEK call to monetize consolidation.
JP Morgan