Money in Motion

The Currency Party Is Winding Down: Strategist


The Fed's QE3 announcement kicked off a party for risk-sensitive currencies, but this strategist says the fun is ending.

That was some week for the euro, huh?

It had been months since the currency closed over 1.3100. But the Federal Reserve's announcement of QE3, coming as the German constitutional court blessed the euro zone bailout and the euro crossed a key technical threshold, sent the common currency - and other risk-sensitive currencies - on a tear.

Well, the weekend is over, and so is the fun, says Jens Nordvig, head of fixed income research Americas and global head of G10 FX strategy at Nomura Securities - and he's got a new trading plan.

"Positive event risk may now be behind us (ECB, German Constitutional Court, Fed)," Nordvig wrote in a note to clients. "Against this background, the near-term outlook for risk assets is less clear to us."

What's bothering him?

"In Europe, uncertainty remains about the timing of a formal Spanish application for aid (beyond aid for the banking sector), and this is already starting to feed into weaker bond market performance. Meanwhile, growth indicators continue to point to downside risk, both Europe, the Asia, and even in the Americas. This should eventually constrain the upside for risk assets.'"

Nordvig always has a trade or two up his sleeve, and this time is no different. A few weeks ago, he recommended that investors go long risk-sensitive currencies against the yen, and now he says it is time to close out those positions.

True, the Bank of Japan is meeting this week, and yes, Ministry of Finance officials have said that currency intervention might be a great idea right now. But Nordvig thinks an interest rate cut, and the resulting downward pressure on the yen, are unlikely.

"We acknowledge that the likelihood of monetary easing by the BOJ is gradually rising as the Fed embarked on its new QE and conflict with China adds further uncertainty to the economic outlook," he wrote. "However, our main scenario remains no additional easing by the BOJ this week, as USDJPY is trading favorably."

Nordvig has booked profits on a British pound-yen trade and a Mexican peso-yen position, and he is looking to book profits on kiwi-yen. For now, he is looking for what "relatively value trades," selling the euro against the Mexican peso and the Australian dollar against the New Zealand dollar.

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