MS Strategic FX Portfolio 10 Feb 2012

MS Strategic FX Portfolio 10 Feb 2012

• Following the overnight decline in commodity
currencies, we entered two trades and booked a
profit in one.
• We have entered a short EURAUD position at
1.2350. We have a stop order of 1.2550 and initially
target 1.1700.
• We also entered a long NZDCHF position at 0.7580.
We have a stop order of 0.7430 and initially target
0.7980.
• We were stopped out of our short GBPCAD trade at
1.5790, booking a modest gain.

Enter Short EURAUD
We maintain our view that EUR will become a funding
currency in 2012 and decouple from traditionally high-beta
currencies, in light of expectation for further expansion of the
ECB’s balance sheet. Although the ECB’s statement was
less dovish than expected this week, the council continues to
highlight downside risks to growth and subdued monetary
activity; indeed, our European economists still predict a rate
cut in March. Meanwhile, with European banks increasingly
using ECB liquidity for refinancing, private investor capital
(often overseas capital) is likely to be squeezed out by
domestic public capital. This is likely to lead to a portfolio
outflow in the months ahead, especially once the European
bank refinancing process starts to gain momentum.

Meanwhile, AUD should stay well supported given elevated
demand for its industrial commodity exports, the highest
carry in the G10, and investment boom in the resources
sector. We expect global monetary easing to benefit highyielding
currencies like AUD. The key risk is if the ECB does
not ease as we expect, which could challenge both legs of
this trade.

Exit Short GBPCAD
We had tightened the stop on our GBPCAD yesterday as we
recognized the near-term risks of UK upside data surprises.

Though the BoE introduced a new round of QE yesterday,
this was largely priced in, so it had little negative impact on
GBP. In addition, with the new round of QE scheduled to roll
off in May, we expect little chance of a catalyst from the BoE
to drive the GBP lower in the near term.

Enter Long NZDCHF
NZD has outperformed this year, benefiting from monetary
policy divergence between its neutral-to-hawkish RBNZ and
other more dovish DM central banks, steady growth among
its Asian trading partners, and a rise in global liquidity
seeking returns. Global monetary easing, combined with
better than expected global economic data, creates an ideal
environment for risky currencies such as NZD to outperform.

Meanwhile, CHF should trade in line with EUR and continue
to steadily decline. SNB Acting Chair Jordan reaffirmed his
commitment to maintaining the EUR/CHF floor in the global
FX markets this week, so we believe CHF will not be allowed
to strengthen as a token of its perceived safe-haven status.

Furthermore, January Swiss CPI came in at -0.8%YoY, the
fourth month of worsening deflation. This incentivizes the
SNB to maintain the floor, and eases any near-term inflation
concerns. The risk to this trade is a quick deterioration in
Greek debt negotiations, which could lead to large crossborder
inflows to Switzerland and challenge the SNB’s
willingness and ability to defend the peg.