FOREX: J.P. Morgan Prefers Longs in Funders/Safe Havens
The US bank weighs in on broader USD outlook. Its preferred expression of a bearish USD view remains in the safe havens/low yielders. See below for more details.
J.P. Morgan: "Fed easing, lower oil and now China stimulus. Have we have finally arrived in the valley of the USD smile? A global soft landing combined with Fed easing, if realized, should eventually weaken USD broadly but the path to get there on this side of the US elections could be treacherous. Trade policy risks are not priced, nor is recession. China’s policy blitz was positive for financial assets, but has not changed the macro outlook; a larger fiscal response is needed to move the needle. We discuss the impact on USD and commodity FX. Meanwhile, Eurozone’s malaise deepens...the euro just doesn’t know it yet.
Macro Trade Recommendations: Continue to focus on a lower range for US yields; overweight funders like CHF and JPY. The LDP outcome removes one source of risk. Stay long JPY. Buy USD/CAD. Sold EUR/CHF after SNB and soft EMU data; hold short EUR/JPY outright, EUR/USD in options.
Emerging Markets FX: Fed easing and China stimulus provide a supportive backdrop for EM FX but we also see signs of complacency ahead of the US election event risk. We remain overall MW EM FX, with reliance on idiosyncratic value, RVs and bearish USD option plays. Some of our favored longs are TRY, ZAR, ILS, MXN, MYR, TWD and shorts PLN, CZK, COP, SGD.
FX Derivatives: Defensive RV long AUD/CHF vol vs short AUD/USD. Buy 3M ATMF USD/TRY puts and MXN/JPY calls. Spot-vol correlation in USD/Asia is performing for downside, creating opportunities. Buy zero-cost USD/JPY inverse ratio put spread for JPY breaking through 140."