Trading strategy from Societe General
How do you trade two steps forward and one step back in FX? Not by looking for volatility to spike higher on the back of Fed policy, and not by selling commodity-sensitive currencies prematurely.
Our favourite shorts are the euro (for political risk) and the yen (with their anchored real yields) but even these are going to see regular short-covering rallies.
- On the bullish side, the possibility of commodity prices grinding higher makes us wary of shorting the AUD or NZD and, by contrast, leaves us bullish of CAD here. It looks to be just a matter of time before the USD/CAD breaks below 1.30 and re-establishes itself in a 1.25-1.30 range.
EUR/CAD shorts appeal on that basis, more at the moment than shorts in EUR/SEK and EUR/NOK both of which have simply run out of steam, at least temporarily.
- The AUD/NZD has bounced, yet again, and at 1.0650 has a little more upside, but the risk-reward of entering that trade here isn't good.
- The EUR/CHF is grinding lower, and there are those who think the SNB is reluctant to add even more to its huge FX reserve pile to prevent the euro from falling. But Swiss franc strength is, to our minds, firstly a sign of what the euro might look like after the French elections (when we want to be long EUR/JPY for the long haul, unless Ms Le Pen wins) and, in the meantime, EUR/CHF isn't the best tactical euro short.
- Sterling is still meandering in a narrow range. Since the Flash crash back in early October, the GBP/USD has traded in a 1.20-1.28 range, with an average of 1.24. The current 1.25 isn't quite high enough for fresh shorts but if we get to 1.26 we'll seriously consider it.
For bank trade ideas, check out eFX Plus.
