FX Top Trades 2013: How to Position for the Coming Year
Six themes, 10 trades
For the fourth time, we present our year-end FX Top Trades for the coming year. In the years 2010-2012, our FX top trades delivered an average return of 3.1%, with a hit ratio of 80% each year.
As in previous years, this year's trade ideas are based on a number of global themes that we believe will dominate the FX market in 2013. We assume that we will: i) see a modest global recovery, ii) that monetary easing will continue, iii) that the current low volatility environment is here to stay, iv) that we will see fewer tail risks, v) that value is to be found in EMEA and finally that vi) macro-prudential polices will be a new important theme to follow in the FX Market. In the table below, we have listed the 10 trade recommendations and have plotted them against the different themes.
We are, as such, not overly optimistic about growth, but we argue that positioning, monetary easing, too modest growth expectations and fewer tail risks warrant a bullish view on the market: hence, most of the trades are expected to be positively correlated with market risk. Especially, we argue that the market is still underestimating the ramifications of the monetary easing we expect to see from the Fed and Bank of Japan in 2013. We also argue that these factors, combined with a continuous low volatility environment, favour all kinds of carry strategies and the EMEA currencies. Finally, we argue that one should buy currencies supported by central banks taking macro-prudential considerations into account.
There is no hedging or portfolio element built into the 10 trades and the return potential is based on a risk/reward ratio of approximately 1:2. We present seven spot/forward trades and three option based recommendations. The latter are primarily used to take advantage of attractive option market pricing, express a view on volatility or lower spot-exposure or hedge tail-risks in the trade recommendations.
We run an active trade management and reserve the right to book profits or take losses at any time should the underlying fundamentals change. We will, of course, follow up on the trades with P/L updates from time to time
FX Top Trades 2013
#1: Bearish JPY/SEK strategy
#2: Long EUR/USD via options
#3: Short USD/CNH via 12M fwd
#4: Long RUB/CZK
#5: Selected carry basket
#6: Short USD/CAD
#7: Long EUR/CHF
#8: Long USD/JPY via options
#9: Short GBP/NOK
#10: Short USD/SGD
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