FX Technical Strategy Weekly

Better than feared US employment data for February accompanied by new liquidity measures in Japan to combat deflationary pressures has reestablished a bid for pro-risk strategies, with a return of JPY led carry trades being touted.

Better than feared US employment data for February accompanied by new liquidity measures in Japan to combat deflationary pressures has reestablished a bid for pro-risk strategies, with a return of JPY led carry trades being touted. A bullish technical set-up for risk assets and commodities, characterized by a move through 5,600 for the FTSE100 and crude oil through $81pb, favours long AUD, CAD, SEK vs JPY strategies over the week ahead. GBP and EUR on the other hand continue to suffer from a growing short investor base and look set to fall further behind the curve vs the high yield an commodity currencies where tightening monetary policies are pursued and where less dovish inflation skews shave become mainstream. Intra-G10 currency variations of correlation with risk assets, interest rate differentials and the SNB meeting will garner close attention next week. For GBP, a shock surge in the February services PMI has diminished the likelihood of a double dip in Q1, though the strength of economic recovery remains highly uncertain. Three MPC members take to the speaker circuit next week, meaning that discussions over the probability of additional QE are set to dictate GBP flows.

Recap

• Commodity currencies outperformed this week, with the Canadian dollar (2.3%), Australian dollar (1.3%) and the Norwegian Krone (0.2%) all posting gains versus the US dollar as equity markets rallied back towards the January highs. Despite further austerity measures in Greece and a successful 10yr Greek government bond auction, the euro failed to gain any traction and ended the week down 0.18% versus the dollar at 1.362.

• Sterling had a poor week, falling 0.85% versus the US dollar to end the week at 1.5108. After a very heavy sell-off on Monday on the back of M&A related flows to a low of 1.4784, GBP/USD managed to claw back some of the losses over the course of the week following upside surprises to PMI survey data and consumer confidence. EUR/GBP spiked higher (through 0.91) on the deal flow before drifting lower to end the week back at 0.90.

•In the emerging market space, the South African rand (up 3.9% to 7.42) and Brazilian Real (up 1.64% to 1.779) outperformed versus the dollar on the back of the rally in commodity and equity markets. Twelve month non-deliverable forwards for the Yuan dropped a touch to 6.64 from 6.65.