9 Apr 2015
Carry trading returns, stick with long EM and short EUR vol trades – Nomura
FXStreet (Barcelona) - Jens Nordvig, FX Strategist at Nomura, explains carry trading has returned as evidenced by rising global equities and EM credit, further suggests to maintain a short volatility bias in EUR/USD.
Key Quotes
“…sentiment has been extremely bearish on EM assets until recently. Hence, a shift in market environment, towards a more sustained carry trading regime could potentially impact EM asset disproportionately.”
“We are already seeing that in the equity space, where EEM has moved 9% since the lows in mid-March. And in EM currency space, we are observing that EUR/EM is again turning south (EURMXN, EURZAR and EURINR are good examples). Meanwhile, the tension observed in sovereign CDS in Q1, is also coming out of the system.”
“…..the trend towards carry outperforming is perhaps clearer in credit/fixed income space than in FX, where idiosyncrasies continue to play a key role (and realized volatility is too high for indiscriminate carry trading to take hold). However, there are emerging signs that sentiment is changing towards a carry-trading mentality again.”
“In addition, technically oriented traders will note that we are now flirting with 50-day and 100-day moving averages in a number of EM crosses. A break could lead to some bullish acceleration (although this argument could cut both ways).”
“Against this background, we are inclined to stick with our long EM FX basket, which up currently around 2.2%”
“In addition, we are inclined to have a short volatility bias, currently expressed through EURUSD DNTs in our model portfolio. Our short dated range trade (barriers at 1.1275 / 1.0425 with expiry 22-May-15) is currently priced at around 43.7% (25% at entry) as EURUSD 1m vol has declined from 12.50 at the time of trade entry to 10.80 currently”
Key Quotes
“…sentiment has been extremely bearish on EM assets until recently. Hence, a shift in market environment, towards a more sustained carry trading regime could potentially impact EM asset disproportionately.”
“We are already seeing that in the equity space, where EEM has moved 9% since the lows in mid-March. And in EM currency space, we are observing that EUR/EM is again turning south (EURMXN, EURZAR and EURINR are good examples). Meanwhile, the tension observed in sovereign CDS in Q1, is also coming out of the system.”
“…..the trend towards carry outperforming is perhaps clearer in credit/fixed income space than in FX, where idiosyncrasies continue to play a key role (and realized volatility is too high for indiscriminate carry trading to take hold). However, there are emerging signs that sentiment is changing towards a carry-trading mentality again.”
“In addition, technically oriented traders will note that we are now flirting with 50-day and 100-day moving averages in a number of EM crosses. A break could lead to some bullish acceleration (although this argument could cut both ways).”
“Against this background, we are inclined to stick with our long EM FX basket, which up currently around 2.2%”
“In addition, we are inclined to have a short volatility bias, currently expressed through EURUSD DNTs in our model portfolio. Our short dated range trade (barriers at 1.1275 / 1.0425 with expiry 22-May-15) is currently priced at around 43.7% (25% at entry) as EURUSD 1m vol has declined from 12.50 at the time of trade entry to 10.80 currently”