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Fixed Income & FX Research
FX - Strategy
UBS Investment Research
FX Morning Adviser
Let Nordics Run Their Course
24 October 2013
Having felt conditions were ripe for a CAD rally, we were taught a harsh lesson on
Wednesday by the BoC: never ever underestimate the determination of a small,
open economy’s central bank to defy expectations for a positive outlook. For them,
the tightening impact of any currency gain is simply too big to risk and retaining
maximum policy flexibility means being as conservative as possible. Even the Fed
adopted the ‘err on the side of easing’ stance in September, though for them the
dollar is a side issue. Regardless, this is the message we take into Thursday’s
Scandinavian policy decisions: inflation surprised to the downside in both Norway
and Sweden in September, so trim longs and don’t expect any favours.
Firstly, developments this week have shown that markets cannot even count upon a
‘risk-positive’ environment anymore to at least give these two high-betas some
tailwind. The AUD’s sharp reaction to a gentle whiff of tightening in China is a
clear sign that exigent positioning in risk longs is almost solely supported by
liquidity, and this factor alone is no longer sufficient to guarantee sustained
performance as major central banks have openly questioned the sustainability of
such strategies. The other potentially supportive factors, central bank tightening
expectations and favourable positioning need to be firmly in place. For NOK and
SEK, the former element will remain elusive, especially for NOK where even
above-target inflation was summarily dismissed. In positioning terms, the picture is
more nuanced. On a medium-term basis, NOK is by far the worst-positioned
currency in G10 and normally this should be sufficient enough to attract some
demand ahead of event risk. However, the structural positioning picture remains
the opposite (Chart 1): slightly less than 50% of the structural NOK longs remain
to be unwound, while SEK positioning is ‘clean’. For illiquid currencies, structural
positioning matter far more, otherwise NOK would have rebounded far earlier.
For the brave, this leaves NOKSEK as the only trade. We believe caution is
necessary because of the liquidity risks involved: last week our flow monitors
registered gross volumes in the two currencies at 47.2% and 60.5% of average,
respectively, while their four-week volumes both stand at 77.5% of average. These
numbers are exceptionally low for October, though other G10 currencies faring
little better. Policy differentials (expressed via spreads) have stabilised, so
NOKSEK staying heavy suggests the cross is undershooting; yet, this is again
because of the positioning pressure on NOK. There is scope for another handful of
pushes lower, but these would open up good entry levels for (very) long-term
longs. But first, let the central bank run its course: NOKSEK is an important
weight in both countries’ individual NEER baskets. Markets aside, the two central
banks probably wouldn’t want to do any favours for each other either.
Chart 1: Pace of selling slowing, but still selling
Chart 2: NOKSEK slight undershooting but hard to fade
2y Rate Differential (RHS)
Sources: FX Flow Monitor
This report has been prepared by UBS Limited
Sources: UBS FX Strategy, Bloomberg
FX Morning Adviser 24 October 2013
With bullish trend in place, the next major resistance focus is at 1.3833. There’s
scope for a setback to unwind the overextended upside conditions from here,
with support at 1.3742 ahead of 1.3651.
Support is at 96.57 ahead of 95.81. Resistance is at 98.48 ahead of 99.07.
Initial resistance is at 1.6260. A break through which would open the way to the
critical 1.6381. Support is at 1.6116.
Further selling pressure saw the pair post new low as it traded below the support
at 0.8931. The next major support is at 0.8864. Resistance is at 0.8966.
Only a close above the resistance at 0.9715 would be positive, triggering further
acceleration. Next resistance is at 0.9792 ahead of 0.9920. Support is at 0.9576
ahead of 0.9463.
Having tested the support at 1.0273, the pair advanced sharply and is
approaching the resistance at 1.0421. A close above which would open the
doors to 1.0568.
Support is at 1.2277 ahead of 1.2215. Resistance is at 1.2336 ahead of 1. 2376.
The recent recovery saw the cross close above 0.8500. This indicates scope for
a prolonged recovery to 0.8551 and then 0.8603. Support is at 0.8484 ahead of
Resistance is at 135.51, a break above which would open the critical 138.49.
Support is at 132.65 ahead of 131.15.
*NOTE: The trend for each currency pair as defined in the table is determined by our proprietary model and is independent of our discretionary interpretation
of price action
Source: UBS FX Strategy
Japan Buying Foreign Bonds (Oct-18)
Japan Buying Foreign Stocks (Oct-18)
Foreign Buying Japan Bonds (Oct-18)
Foreign Buying Japan Stocks (Oct-18)
Flash Mfg PMI (Oct)
RBA's Lowe Speaks
PMI Manufacturing (Oct A)
PMI Services (Oct A)
Riksbank Interest Rate
PMI Manufacturing (Oct A)
PMI Services (Oct A)
PMI Composite (Oct A)
ECB's Costa Speaks
Riksbank's Ingves Speaks
CBI Trends Total Orders (Oct)
CBI Business Optimism (Oct)
Trade Balance (Aug)
Initial Jobless Claims (Oct-19)
Continuing Claims (Oct-12)
PMI Preliminary (Oct)
Riksbank's Martin Speaks
Kansas City Fed Manf. Activity (Oct)
BOE's Carney Speaks
Leading Index (Sep)
Source: UBS Global Economics, Bloomberg LP, Reuters LP, Reuters, Market News International