We are closing down a few trades from December’s FX Top Trades 2014: How to position for the coming year (9 December 2013), a recent trade on CAD, as well as a long-standing call for substantially lower levels in EUR/USD, which now seems out of reach in the near term.
In our recent FX Trends: Central bankers push 'snooze' button, 18 March, we stress that most central banks have effectively pushed the ‘snooze’ button on rates, with notably the ECB feeling constrained by the zero lower bound and an impaired bank-lending channel and the Fed and Bank of England keen to play down their first-mover status on rates and thus any unwarranted money-market tightening by stressing that eventual rate hikes will be limited and gradual. As a result, everyone is busy stating that they are not in a hurry to touch policy rates.
Notably, in FX Top Trades 2014: How to position for the coming year, 9 December 2013, we recommended 10 trades to position for the themes we deemed important for the FX market in 2014. While the positive supply shock that we highlighted as a key driver is still unfolding, central bank reactions to this in our view now make it attractive to close down a few of the suggested trades form this publication.
Closing down two short CAD positions
In December 2013, we suggested positioning for a move lower in CAD and AUD against USD and we now take profit on the (long) USD/CAD leg, keeping the short AUD/USD leg open still. We are not convinced the Bank of Canada (BoC) will cut rates, albeit Poloz and company have adopted an easing bias lately and thus we see the potential for further USD/CAD upside as limited. In contrast, while the Reserve Bank of Australia (RBA) has toned down its Aussie-strength worries, we expect to see AUD/USD come under pressure again, as the Chinese slowdown is set to continue and RBA will be alert to any appreciation. We thus book a weighted profit of 2.07% (spot ref.: 1.1190) on the long USD/CAD leg of Top Trade #7 from FX Top Trades 2014: How to position for the coming year, 9 December 2013.
Consequently, we also close the remaining part of the 1M3M USD/CAD calendar spread that we recommended entering in FX Market Update: EM sell-off has eased – sell 3M EUR/PLN straddle, 6 February. Here we recommended selling 1M 1.1080 call and at the same time buying 3M 1.1080 call option with half notional. The strategy was entered at zero cost and as the sold 1M call option expired on 6 March out of the money, we now close the bought call option and book a profit of 0.85% of USD notional (spot ref.: 1.1190). Note that P/L is measured as percentage of the highest notional.
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