16 Jun 2014
Suspended reality in FX - SocGen
FXStreet (Bali) - Vincent Chaigneau, FX Strategist at Societe Generale, shares his view on the current market conditions, noting that financial repression has hit the FX shores.
Key Quotes
"FX vols have dropped to historical lows, both in G10 and EM. The last time that they were this low (2007), the music suddenly stopped and a massive risk unwind started. This time however, money remains much easier. The Fed is exiting at a snail’s pace, while the ECB, BoJ and PBoC are mulling further easing."
"Central banks are suspending reality, forcing investors into yet another fake risk paradigm. Depressed vols have rejuvenated the FX carry trade, though many FX investors have been reluctant to join the party."
"We remain selectively long but with limited exposure where valuations are stretched (e.g. NZD rich, JPY cheap). Arguably risk conditions may wobble in Q4, as QE ends and investors focus on the Fed’s next move (hike). Yet by historical standards, Fed policy will still be exceptionally easy."
"Our favourite G10 basket for H2 bets on policy de-ynchronisation: long USD, GBP and NOK vs CHF, EUR and SEK. Our old view of a ‘reluctant’ rise of the US dollar remains valid. A decisive break higher would require both rising Fed fears and shakier risk conditions."
Key Quotes
"FX vols have dropped to historical lows, both in G10 and EM. The last time that they were this low (2007), the music suddenly stopped and a massive risk unwind started. This time however, money remains much easier. The Fed is exiting at a snail’s pace, while the ECB, BoJ and PBoC are mulling further easing."
"Central banks are suspending reality, forcing investors into yet another fake risk paradigm. Depressed vols have rejuvenated the FX carry trade, though many FX investors have been reluctant to join the party."
"We remain selectively long but with limited exposure where valuations are stretched (e.g. NZD rich, JPY cheap). Arguably risk conditions may wobble in Q4, as QE ends and investors focus on the Fed’s next move (hike). Yet by historical standards, Fed policy will still be exceptionally easy."
"Our favourite G10 basket for H2 bets on policy de-ynchronisation: long USD, GBP and NOK vs CHF, EUR and SEK. Our old view of a ‘reluctant’ rise of the US dollar remains valid. A decisive break higher would require both rising Fed fears and shakier risk conditions."