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In this publication: Uncertainty surrounding Brexit has triggered risk aversion, which weakened the CAD and the NOK, resulting in hitting of our profit protection in short EUR/NOK and stop loss in long CAD/SGD. We keep in place our HUF long versus EUR and GBP short versus USD.
160617-FX-Conviction-update.pdf (275 KB)
Close short EUR/NOK and long CAD/SGD high conviction calls
We initiated our short EUR/NOK and long CAD/SGD high convictions calls on 19 February and 11 May 2016 respectively. On 16 June, our profit protection at 9.40 in EUR/NOK and stop loss in CAD/SGD were triggered as Brexit fears escalated and crude oil prices fell. The latter was due to investors taking profit on their net long positions in crude oil.
In addition, during periods of mild risk aversion, the SGD has outperformed its peers given Singapore’s current account surplus and net positive international investment position. The strength in the Japanese yen recently has also supported the SGD as the yen weight in the SGD trade weighted basket is the fourth largest, after the Chinese yuan, the US dollar and the euro. In our view, the strong S$NEER if sustained is likely to put downward pressure on core inflation in Singapore. Hence the risk of the Monetary Authority of Singapore lowering the centre of policy band in the next monetary policy meeting in October has risen. Last but not least, the recent downward revision of US GDP by the FOMC has also dented market hopes that the Canadian economy would benefit as the US economy (Canada’s largest export partner) recovery is slower than expected.
We remain positive on crude oil prices and hence both the NOK and CAD should benefit as a result. Our short EUR/NOK initiated at 9.54 and long CAD/SGD at 1.0590 realized a profit of 2.7% and loss of 1.8%, respectively.
We remain positive on the HUF versus the euro…
We expect the Hungarian forint to continue to outperform the euro this year and next year. Financial markets have taken Hungarian politics for granted so this will unlikely weigh on investor sentiment towards the forint. On 20 May Fitch ratings agency upgraded to BBB-. This supported sentiment. Hungary has a substantial current account surplus which will likely shield it from a sharp deterioration in investor sentiment on financial market. Despite the fact that the Hungarian central bank will probably further ease monetary policy in the near-term, this will be very modest and less than what financial markets appear to anticipate. Further down the road, higher inflationary pressures and a strong economy will likely result in more aggressive rate hikes later on. This should result in a strong rally in the forint versus the euro. In short, current relatively low levels in the forint are an opportunity to position for strength in later this year and next year.
…and we keep GBP short versus USD
This week, Brexit worries returned with a vengeance. Polls confirmed that the Leave camp is ahead and Bookmakers odds that the UK would vote to leave the EU rose. This resulted in risk aversion in financial markets and weighed on the sterling. With the uncertainty growing, we think that there will be further downward pressure on sterling ahead of the referendum. Therefore, we keep in place our sterling short versus US dollar. We will keep this position over the referendum, but we will most likely lower our stop loss ahead of the referendum.