Cutting our risky FX call to neutral

- Cutting our risky FX call to neutral "We choose to cut our tactically bullish stance on risky currencies and revert to a ‘neutral’ call. ‘Flipping NOLI’ indicates that there remains some error between actual and market-implied NOLI, but it has narrowed significantly since we first recommended a tactically bullish stance. One important rationale for retaining our ‘tactically bullish’ stance on 5 August was based on the notion that we were statistically likely (69%) to be in a phase of positive momentum for risk. We caught the 31%. Indeed, our latest assessment of positioning seems to suggest that there is limited short-term scope for a sustained improvement in pro-risk positioning. In this piece we also briefly explore our views on the US employment situation (pessimistic relative to consensus), the US policy situation (optimistic relative to consensus) and China growth and policy (somewhat optimistic, but concerned that we have been complacent)."
- The potential impact of a Potash deal on "Potash has rejected BHP Billiton’s initial offer. But the spike in Potash’s stock price suggests that the market sees a high probability that BHP will submit a higher offer. The reported financing structure and BHP’s (non) hedging policy suggest that the bulk of the transaction value will translate into CAD buying in the FX spot market. While CAD has already appreciated around 1.5% on the back of the news, we do not think the currency is fully pricing in a reasonable probability that we could see the biggest
ever M&A inflow."
- JPY - Effective JPY rate, monetary easing and intervention "The government and the BOJ have started to try in earnest to stop JPY appreciation via aggressive verbal intervention. Yet despite all appearances, we think that the government has not obtained the agreement of other countries regarding intervention and is not yet in a position to intervene. Similarly, the BOJ has not yet expressed any deep concern about the economic situation. We think that if any easing by the BOJ falls short of the market's expectations, JPY could remain on a medium-term strengthening trend."
- JPY - Taking a closer look at investment flows that fail to tally with JPY appreciation "In July, USD/JPY declined despite record net purchases of foreign securities by Japanese investors. We see two possible reasons for this: 1) the inclusion of a large amount of exchange rate-neutral transactions in the figure for outward portfolio investment, such that downward pressure on JPY was less than appearances suggest, and 2) the JPY-positive impact of factors such as inward portfolio investment, speculative positioning, and currency hedging by Japanese institutions and companies."
- Capital Flow Monitor - Shift in June as foreigners sold eurozone fixed income "Portfolio flow data showed that foreigners were net sellers of eurozone fixed income assets in June, having bought sizeable amounts in April and May. Foreigners were net buyers of eurozone equities, and eurozone residents were net sellers of foreign assets, bringing total net portfolio flows to a small positive. In our view, the report suggests that some of the EUR weakness in June is being driven by negative sentiment among investors towards eurozone assets."
- Singapore - No change expected at the October MAS policy announcement "The Monetary Authority of Singapore (MAS) is probably about to commence its policy review process, which we think is likely to lead to the MAS maintaining the 2% annual appreciation path of the S$NEER as its base case with no change in the width of the bands. However, we currently see some risk that the MAS could take a more aggressive stance, which could entail increasing the annual slope of appreciation to 3% (a similar move occurred on 10 October 2007 when the MAS announced it would “increase slightly” the slope of the S$NEER policy band). We see this as a relatively small probability event, but it could materialize given upside inflation risk in 2H10."
- EMFX Portfolio Update - Scaling into 5Y TRY payers and buying EUR/TRY "We believe the short-term risk reward suggests exploring the opportunity of paying 5y TRY cross currency for a market priced for perfection. We also add 1m call spreads in EUR/TRY, in addition to rolling USD/TRY call spreads."
- Turkey trip notes - Partly cloudy with sunny intervals "We visited Istanbul and Ankara, and the theme seems to have changed from a safehaven to one of the start of imbalances. The fundamentals still highlight a bullish story in Turkey and the safe-haven theme is priced in over the next three months. Nevertheless, we see some dark clouds lurking (particularly for the rates market and relative to the current pricing) and discuss some of the domestic demand and monetary exit concerns."
- EMFX Portfolio Update - Reduce R207 and exit TRY 1y1y payers "5y5y is the new 1y1y theme has been a key one for us. Accordingly we have been long South Africa 10y bonds (R207s) and have tactically paid 1y1y TRY. Both views worked, but we have reasons to reduce risk in the short-term and thus we are halving the exposure on R207and exiting the TRY 1y1y payer."
- FX Quant Insights - When there was no trend "The bane of any trend-following strategy is when the market becomes range bound. In this article we look at a method for determining whether the market is trending or not by looking at the gradient of moving averages. The rationale is that moving averages tend to flatten during periods of range-bound price action. We find that our gradient-based trading rule outperforms simple moving-average crossovers, which suggests the gradient-based approach adds value compared with simpler technical indicators. We also show that filtering a simple moving average using a gradient adds value."

Nomura Global FX Weekly 20100819

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