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18 Sep 2013
Flash: Don’t watch EUR/USD & USD/JPY for Septaper correlation trades - BMO Capital Markets
FXstreet.com (Barcelona) - Stephen Gallo, European Head of Currency Strategy at BMO Capital Markets believes that EUR/USD and USD/JPY are not the best value Septaper trades, irrespective of popular opinion.
Key Quotes
“I continue to hear FX market participants mention Fed taper as a key factor for positioning in EUR/USD and USD/JPY. However, my observation of correlations over the past few months is that neither of those pairs has been highly correlated with the Septaper theme.”
I view the 5-year tenor of US interest rates as the best one for gauging temper expectations, (and) the currency pairs with the tightest correlations to US 5yr Treasury yields are AUD/USD, USD/BRL and USD/MXN.”
“If higher US rates are supposed to lift the US dollar, then the sign of the correlation on EUR, GBP and JPY is wrong.“
“With that in mind, I think it makes sense for G10 specialists to ignore them and stick to selling AUD/USD if the Fed tapers as expected. I believe a taper decision of either $10bn or $15bn will lead to 1.0 to 1.5% of instant downside in AUD/USD. I could easily see a taper decision prompting a move back down to 0.90 on a one-week horizon.”
Key Quotes
“I continue to hear FX market participants mention Fed taper as a key factor for positioning in EUR/USD and USD/JPY. However, my observation of correlations over the past few months is that neither of those pairs has been highly correlated with the Septaper theme.”
I view the 5-year tenor of US interest rates as the best one for gauging temper expectations, (and) the currency pairs with the tightest correlations to US 5yr Treasury yields are AUD/USD, USD/BRL and USD/MXN.”
“If higher US rates are supposed to lift the US dollar, then the sign of the correlation on EUR, GBP and JPY is wrong.“
“With that in mind, I think it makes sense for G10 specialists to ignore them and stick to selling AUD/USD if the Fed tapers as expected. I believe a taper decision of either $10bn or $15bn will lead to 1.0 to 1.5% of instant downside in AUD/USD. I could easily see a taper decision prompting a move back down to 0.90 on a one-week horizon.”