FX: Positions investors will put on for 2018 – Danske Bank

With year-end behind us, focus now turns to which FX positions investors will put on for 2018 as this could trigger big FX moves already early January, suggests the research team at Danske Bank.

Key Quotes

“Specifically, we expect the themes and trades outlined below for the year ahead to play out.

• Theme #1. The cyclical outlook will still support FX carry trades, although we highlight that long-volatility positions look increasingly attractive as a hedge. From a cyclical point of view, we see support to the NOK, EUR, HUF and RUB, notably versus the USD.
• Theme #2. Policy ‘normalisation’ will stay a key theme and the ECB could unleash the next wave of ‘normalisation trades’ mid-2018 and support the EUR via debt flows. However, it will be a long way to the ‘exit’ for the Riksbank, which will weigh on the SEK.
• Theme #3. Jerome Powell’s Fed is less experienced when it comes to market communication and, presumably, crisis handling. This could be a drag on the USD, as we find evidence of a ‘Fed experience premium’ historically.
• Theme #4. Scandi housing fragility has moved to the fore recently and uncertainty will prevail, notably in Sweden, for an extended period. The housing skies will clear for the NOK, while dark clouds will linger in Sweden and be a Riksbank constraint.
• Theme #5. The potential for larger corrections arguably depends on the degree of over/undervaluation. Our fundamental valuation models suggest GBP, EUR and NOK upside versus notably the USD and the Danske currency-vulnerability scorecard puts the USD at risk, while the HUF looks attractive.”

“Hence, for the coming year we like to position for a stronger NOK vs the EUR and SEK, a higher EUR/USD as well as a lower USD/RUB, EUR/HUF and EUR/GBP. Also, even if the cyclical environment suggest support to carry strategies we find value in buying USD/SEK volatility as a hedge.”

“In the very near-term oil volatility will stay in focus amid rising tensions in Iran. Meanwhile, as we have previously noted, when geopolitics drive the oil price the impact on oil currencies such as NOK, RUB and CAD tend to be smaller than when the oil price is driven by global demand shocks. Indeed, we think geopolitics returning to the oil price is one of several reasons why we have seen oil FX correlations decline in H2 2017.”