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November 27, 2013
FX Pulse

FX Overview
Ian Stannard, Meena Bassily
• Relative yield curve shifts are having an increasing impact on
FX markets, we believe…
• …with the CAD and JPY standing out as the most vulnerable
to a relative steepening of the US yield curve. We maintain
our long USDJPY and EURJPY positions.
• Incorporating highly leveraged economies into the equation
suggests that the SEK should also be added to our list of
vulnerable G10 currencies. We remain long USDSEK.
• We also find that the AUD is becoming sensitive to yield
curve dynamics, but shifts in Chinese rather than US yields…
• …thus, we maintain our bearish stance towards AUD as
Chinese financial conditions continue to tighten.
• We believe that EURUSD is now topping out and maintain
our newly established bearish strategy.
• We add a bullish USDCHF recommendation to our portfolio.
• Several EM policy makers have kept to dovish biases, with
the Bank of Thailand and National Bank of Hungary cutting
rates this week.
• The technical backdrop for EM currencies continues to slowly
worsen, and with little evidence of a pick-up in fundamentals,
we keep to a bearish outlook. We stay long USD/RUB.

tapering, especially if accompanied by enhanced forward
guidance, could see the US yield curve steepening (See US
Interest Rate Strategy Insight, Pulling on a String, November
22, 2013). Hence, we maintain our bullish USD stance and
expect gains to be emphasized against the CAD and JPY,
with potential for EURUSD and GBPUSD to come under
We also examine the potential vulnerabilities of currencies to
a rise of yields and steepening of yield curves via private debt,
as we believe that countries with higher levels of leverage,
especially where this has been used for unproductive
investment, are likely to be particularly vulnerable. Using
measures such as overall levels of private sector debt, net
international investment positions and growth in investment to
GDP relative to overall GDP growth, we find that the
commodity-related currencies stand out as being the most
exposed, along with the Scandinavian currencies.
Taking these metrics together, we believe that the CAD, JPY
and SEK are likely to be the most vulnerable among the G10
currencies once tapering expectations intensify. Hence, we
maintain our long USDSEK and USDJPY positions and our
short EURUSD strategy. We take profits on our EURJPY long
position and also add a long USDCHF recommendation to our
portfolio this week.
Exhibit 1

Gross Private Debt (% of GDP)
Yield Curve Sensitive Currencies
Relative yield curve dynamics are becoming an important
driver for FX, we believe, with the major currencies now
increasingly sensitive to the relative changes in the slope of
yield curves. While the CAD and JPY remain the most
sensitive of the G10 currencies to relative changes in yield
curves, we note that this is an increasingly important influence
This renewed sensitivity of currency markets to yield curve
dynamics comes in an environment where changes in global
policy are likely to have a significant impact on bond markets.
With many of the G10 central banks continuing to employ a
dovish stance, including various forms of forward guidance to
signal a lower for longer rate policy and to maintain control of
the front end of the yield curve, there is potential for yield
curve steepening to take place. This is likely to be most
emphasized in the US as the tapering debate gains
momentum. The Fed’s QE is one of the strongest forms of
control of the longer end of the yield curve, hence the start of


Source: Haver Analytics, Morgan Stanley

AUDCNY Pushing Lower
We identify the AUD as vulnerable from a private leverage
point of view, although the sensitivity of AUDUSD to relative
yield curve shifts is lower than it is among its commoditycurrency peers. However, we find that the AUD is sensitive to
developments in Chinese yields, and the recent rise in