FX Strategy Weekly

US dollar weakness and Swiss Franc strength translate into an interesting setup heading into the UK Budget, the FOMC and G20 summit next week, and is manifested in USD/G10 crosses approaching potential breakout territory and a rebound in volatility. GBP, NOK, SEK and the CHF all look set to test recent highs as equities negotiate one-month highs.

• Market Outlook

Tactical view:

= buy CHF dips vs EUR, GBP

US dollar weakness and Swiss Franc strength translate into an interesting setup heading into the UK Budget, the FOMC and G20 summit next week, and is manifested in USD/G10 crosses approaching potential breakout territory and a rebound in volatility. GBP, NOK, SEK and the CHF all look set to test recent highs as equities negotiate one-month highs. Underlying trading themes have not changed and should primarily continue to revolve around sovereign debt risk and the timing of a yuan reval, with US Q2 company results moving onto our radar. We stick to our longer-term bullish USD view but are pragmatic in a context where gold is hitting new highs and deteriorating US macro data and pressure from the G20 to curb public deficits have taken some wind out of the dollar’s sails.

• Recap

• Gold rose to a new high above $1,260 and platinum also rallied as US dollar weakness returned, but unconfirmed sources report that China was behind the strategic purchases of the precious metals. However, the decoupling with copper is striking and tells us of potential divergence in view over the path for risk assets, also characterised by the sideways price action in major equity benchmarks. GBP experienced a mixed week, gaining ground vs the USD, but posted substantial losses vs the CHF (sharing the pain with the rest of the G10). GBP/CAD rose 0.9% and GBP/JPY firmed 0.7%. The CHF was the star performer after the SNB changed its position on deflationary risks and the strength of the Franc. The CHF gained 3.4% vs the USD, 1.9% vs GBP, and 1.4% vs the EUR.

• UK CPI inflation slowed to 3.4% y/y in May from 3.7% y/y in April. RPI inflation eased to 5.1% y/y from 5.3% y/y. The core CPI rate dropped back below 3% to 2.9% y/y. Stronger than expected labour market stats for May reported a fall in total jobless claims back below the 1.5mln threshold, though the employment rate slipped and inactivity rate ticked higher. The RICS reported a bounce in its May house prices index to 22% from 19%, a 4-month high. In his annual Mansion House speech, BoE governor King said that a hike in Bank Rate would precede asset sales. The governor reiterated that inflation should ease back in the months ahead, but shared his concern and said is closely monitoring the rise in inflation expectations.

• UK 5y swaps closed near the highs of the week at 2.61% after touching the upper limit of the 4-week range (2.63%). 3-mth Libor held steady at 0.73% for a 2nd successive week, causing the 3mth Libor/5y swaps curve to steepen up to 189bp. The 3mth Libor/ois spread ended the week flat at 24bp. The 2y/10y swaps curve steepened to 204bp (+10bp), approaching resistance at 206bp. Strong auctions took place for the 2014 gilt (b/c 2.28). The 2017 IL mini-tender was covered 2.53 times. America Movil sold £650mln in 2030 paper (165bp over).

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