Trading G10 FX Is Very difficult Once Again: How To Position? - SocGen

Trading G10 FX is, once again, very difficult due to the lack of sustained trends. So we stick with ‘Brexit’ shorts in GBP, and shorts in NZD on the grounds that the RBNZ has room to ease amid disinflationary pressures and that the Chinese growth slowdown will deepen.

Long AUD/NZD is another relative value way of positioning for further Kiwi dollar weakness. Calmer markets may allow EUR/CHF to claw its way gradually higher, but after being stopped out of CHF/SEK shorts, we are wary of getting sucked back in too soon.

Overall, it’s an environment that may see FX volatility fall back again. A clear USD trend in either direction needs a new catalyst, though on balance we would look for USD weakness over strength. Specific non-G3 ‘stories’ around ‘Brexit’, oil (CAD and NOK), and room to ease (RBNZ) have to replace the louder ‘risk-on/risk-off’ theme that dominated the first six weeks of the year.

Recent months have provided evidence that unconventional monetary policy might be hitting against limits, especially when it comes to the exchange rate channel. Over the course of the past year, the trade-weighted EUR, SEK and JPY have all appreciated despite the utilisation of both negative interest rates and large-scale asset purchases by their respective central banks (Chart 3).

Both the yen and euro have in particular benefitted from the recent global financial turmoil, while the krone has appreciated since the Riksbank’s announcement last week of deeper negative rates. The euro is clearly becoming more affected by Fed rate expectations than ECB policy, with the EU-US 10y rate differential continuing to closely influence the direction of the EUR/USD exchange rate (Chart 4). Moreover, all three currencies have benefitted from being associated with sizeable current account surpluses, which tend to provide support in times of heightened global market stress. This adds to the growing sense that monetary policy alone is inadequate to the task of igniting a sustainable pick-up in economic demand.

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