DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION ® Client-Driven Solutions, Insights, and Access FX Compass: The Final Countdown FX Strategy Today’s FOMC meeting is very much in play. Surveys suggest that 35%-40% of market participants, roughly speaking, expect a tapering announcement today. We continue to think the risk of a Fed move is underestimated as virtually all the data received since the beginning of the month has been taper-supportive. The US labor market is registering a fresh bout of strength that now makes the mild summer slump look to be a brief interruption of an improving trend. A clean budget deal, stronger growth and employment data, coupled finally with a bit of firming in core CPI all seem to tick the various boxes on tapering. If the Fed chooses to skip this meeting it likely would owe to an ultra-cautious evaluation of prospective liquidity conditions into year end. In absence of a taper we expect the FOMC to telegraph a January tapering. This would serve to anchor expectations and immunize the Fed against a potential small moderation of the data over the coming month. We favor sticking with core thematic dollar bullish trades that should work against a backdrop of shifting Fed policy even if they might experience some short-term volatility. In particular, we look to dollar pairs where the other central bank is biased to deliver more easing relative to a Fed that is beginning the process of backing away from its extraordinary policy measures. Here the two standouts remain AUDUSD (lower) and USDJPY (higher). Trade Recommendations We reiterate our top trades from our year-ahead report. Please see 2014, The Year of the Dollar for more detail. 1. Short AUDUSD o AUDUSD digital puts o 1y AUDUSD puts financed by selling AUDJPY puts o EURUSD lower, EURAUD higher dual digital 2. Long USDJPY o 2m USDJPY calls o USDJPY RKI risk reversals (buying USDJPY call) o EURUSD lower, EURJPY higher correlation structures 3. Long USD/EM o 1m USDSGD calls o 2m USDTRY RKO calls o 2m USDZAR RKO calls 18 December 2013 Fixed Income Research http://www.credit-suisse.com/researchandanalytics Research Analysts Mark Astley +44 20 7883 9931 [email protected]Anezka Christovova +44 20 7888 6635 [email protected]Matthew Derr 212 538 2163 [email protected]Ric Deverell +44 20 7883 2523 [email protected]Ray Farris +65 6212 3412 [email protected]Helen Haworth +44 20 7888 0757 [email protected]Carl Lantz 212 538 5081 [email protected]Trang Thuy Le +65 6212 4260 [email protected]Alvise Marino 212 325 5911 [email protected]Bhaveer Shah +44 20 7883 1449 [email protected]
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DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES AND
ANALYST CERTIFICATIONS.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®
Client-Driven Solutions, Insights, and Access
FX Compass: The Final Countdown FX Strategy
Today’s FOMC meeting is very much in play. Surveys suggest that 35%-40% of
market participants, roughly speaking, expect a tapering announcement today.
We continue to think the risk of a Fed move is underestimated as virtually all the
data received since the beginning of the month has been taper-supportive. The
US labor market is registering a fresh bout of strength that now makes the mild
summer slump look to be a brief interruption of an improving trend.
A clean budget deal, stronger growth and employment data, coupled finally with
a bit of firming in core CPI all seem to tick the various boxes on tapering.
If the Fed chooses to skip this meeting it likely would owe to an ultra-cautious
evaluation of prospective liquidity conditions into year end. In absence of a taper
we expect the FOMC to telegraph a January tapering. This would serve to
anchor expectations and immunize the Fed against a potential small moderation
of the data over the coming month.
We favor sticking with core thematic dollar bullish trades that should work
against a backdrop of shifting Fed policy even if they might experience some
short-term volatility.
In particular, we look to dollar pairs where the other central bank is biased to
deliver more easing relative to a Fed that is beginning the process of backing
away from its extraordinary policy measures. Here the two standouts remain
AUDUSD (lower) and USDJPY (higher).
Trade Recommendations
We reiterate our top trades from our year-ahead report. Please see 2014, The
Year of the Dollar for more detail.
1. Short AUDUSD
o AUDUSD digital puts
o 1y AUDUSD puts financed by selling AUDJPY puts
o EURUSD lower, EURAUD higher dual digital
2. Long USDJPY
o 2m USDJPY calls
o USDJPY RKI risk reversals (buying USDJPY call)
o EURUSD lower, EURJPY higher correlation structures
Technical Analysis: AUD and JPY Are Expected To Weaken Further Into Q1 2014 A weaker AUD has been one of core themes and trades for this year and this trend is
expected to extend into Q1 2014. AUDUSD has extended its sell-off is now approaching
our next downside support target at .8848, which marks the low for the year. We would
expect a fresh attempt to hold in here and allow for a corrective bounce from it. However,
we remain firmly bearish and look for break below it to see a fresh bear phase down to
the lower end of the multi-year bear channel at .8738. With the 38.2% retracement of the
entire 2001/2011 bull move just below at .8675 we would expect a fresh basing effort into
this support zone. Direct extension through .8675 would signal a more extended bearish
phase to half the 2008/2011 move higher at .8546 then .8066/.7948.
A weaker JPY has also been another key theme for us in 2013. USDJPY is now at a
critical juncture as it has rallied to test key long-term resistance at 103.10/74. This marks
not only the former price higher for the year, but also the first major retracement (38.2%) of
the 1998/2011 fall. Given the significance of this level it is not surprising to see an initial
hold beneath here. We allow for this area to cap further and even to see a retracement
back from it. However, our bias is still for an eventual break above here to challenge the
61.8% retracement of the 2008/2011 fall at 105.60 above which finds a tougher test at
110.60/111.60. This marks half the 1998//2011 fall and the 2008 peak and we would look
09-Oct-13 Long GBPNOK 1 9.59 9.65 10.45 9.75 3.04% 303,858
05-Nov-13 Long GBPSEK 1 10.47 10.49 11.25 10.45 1.68% 168,132
12-Nov-13 Long USDTRY 1 2.05 2.09 2.15 2.00 -1.57% (156,863)
Unrealized P&L 580,012
Realized P&L 2013 (1,011,625)
Total P&L 2013 YTD (431,612)
Gainers/Total 2013 39%
Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at the original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments may be subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. The P&L results shown do not include relevant costs, such as commissions, interest charges, or other applicable expenses. Source: Credit Suisse
Exhibit 19: Derivatives Trade Recommendations Update – Active Positions
For full table including closed trades, please see Locus Trade Tracker
Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at the original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments may be subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. The P&L results shown do not include relevant costs, such as commissions, interest charges, or other applicable expenses. Source: Credit Suisse
18 December 2013
FX Compass: The Final Countdown 12
FX Forecast Summary
Major Currencies1 vs. Spot
17 Dec 2013
Forecasts
Comments 3m 12m
US Dollar TWI 86.30 90.70 95.99 Bullish. With tapering likely to come back into focus in early 2014, we
expect many EM currencies to remain under pressure, as the excesses of
the unprecedented period of record low US interest rates begin to reveal
themselves. The much softer-than-expected euro area inflation print and
expectations for a more dovish ECB have caused us to turn more bearish
on EURUSD. In addition, the USD should retain its upward momentum
against the JPY and AUD over the medium term.
by market convention EUR 1.377 1.310 1.240
JPY 102.8 110.0 120.0
GBP 1.643 1.607 1.550
CHF 0.886 0.939 0.984
AUD 0.915 0.850 0.800
CAD 1.063 1.100 1.130
SEK 6.529 6.947 7.419
Euro TWI 97.5 95.8 94.37 Bearish. Following the 7 November refi rate cut we anticipate a continued
dovish ECB, with risks of further rate cuts should activity data disappoint or
inflation not bounce back from its low level. Combined with the renewed
focus on the looming Fed taper, the euro should head down against the
dollar.
foreign currency units per
euro
USD 1.377 1.310 1.240
JPY 141.5 144.1 148.8
GBP 0.838 0.815 0.800
CHF 1.219 1.230 1.220
AUD 1.505 1.541 1.550
CAD 1.463 1.441 1.401
SEK 8.988 9.100 9.200
Japanese Yen TWI 135.7 129.6 121.7 Bearish. In the near term the yen is vulnerable to the possibility of an early
December taper and the risk of additional positive US data surprises. In this
scenario December could see material weakness for the yen, as it
continues on the downwards trend seen during the past few weeks.
Furthermore, the expectation for the BoJ to further ease in January adds to
our bearish near-term forecast. In the longer term we believe the Japanese
economy needs a weaker currency, and expect policy divergence to
continue widening in 2014 to take USDJPY to our 12-month forecast of 120.
yen per unit foreign
currency
USD 102.8 110.0 120.0
EUR 141.5 144.1 148.8
GBP 168.9 176.8 186.0
CHF 116.03 117.15 121.97
AUD 93.99 93.50 96.00
CAD 96.7 100.0 106.19
SEK 15.74 15.84 16.17
UK Sterling TWI 83.82 85.66 86.72 Mixed. Continued strong UK data and falling unemployment support GBP
versus the euro and the Scandis, although a dovish BoE may provide some
offset. But cable is likely to retrace as part of the anticipated general dollar
strength.
foreign currency units per
pound
USD 1.643 1.607 1.550
EUR 1.193 1.227 1.250
JPY 168.9 176.8 186.0
CHF 1.455 1.509 1.525
AUD 1.796 1.891 1.938
CAD 1.746 1.768 1.752
SEK 10.73 11.17 11.50
Swiss Franc TWI 146.6 144.5 145.1 Neutral. We expect little change in EURCHF in the near term but see some
potential for CHF depreciation further out given the SNB’s likely continued
dovish-ness and limited drag from the unwind of 'safe–haven' flows.
However this is counteracted by improving Swiss growth prospects, strong
current account surplus flows, and the risk of ECB continuing its dovish
stance if euro area prospects further deteriorate.
francs per unit foreign
currency (per 100 units
for JPY and SEK)
USD 0.886 0.939 0.984
EUR 1.219 1.230 1.220
JPY 0.862 0.854 0.820
GBP 1.455 1.509 1.525
AUD 0.810 0.798 0.787
CAD 0.834 0.854 0.871
SEK 13.57 13.52 13.26
1 Major currencies, defined and ranked by order of their reported foreign exchange market turnover from the BIS 2004 Triennial
Central Bank Survey.
18 December 2013
FX Compass: The Final Countdown 13
Regional Currencies vs.
Spot
17 Dec 2013
Forecasts
Comments 3m 12m
Americas
Brazilian Real USD 2.308 2.400 2.580 Bearish. The deterioration in Brazil's fiscal accounts exposes the credit to a
downgrade risk. Furthermore, we think the currency remains vulnerable to Fed
tapering. Finally, we think political risk will rise ahead of the October election.
Canadian Dollar TWI 107.2 104.5 103.0 Bearish. Monetary policy divergence between Canada/US has widened.
Should data remain soft, we think markets would start pricing in a more dovish
policy stance. Lastly, the shift in the US energy sector is proving very
challenging for the Canadian economy.
USD 1.063 1.100 1.130
Mexican Peso USD 12.86 13.10 12.60 Medium-Term Bullish. Structural reform progress, especially in the energy
sector could lead to a significant pickup in FDI flows. In addition, the low/high
gearing towards the US makes the peso better positioned than the rest of EM.
Colombian Peso USD 1931 1950 1980 Neutral. Our expectations of strong FDI inflows suggest that COP is less likely
to suffer from the deterioration in funding conditions otherwise expected for
emerging markets.
Chilean Peso USD 530.3 540.0 545.0 Bearish. We expect further central bank easing in combination with Chile’s
poor basic balance and gearing towards China to continue to weigh on the
peso.
Pacific
Australian Dollar USD* 0.915 0.850 0.800 Bearish. With the RBA rejoining the global “race to the bottom,” and mining
investment likely to peak this year, we think AUD is likely to come under
pressure as the Australian economy rebalances. JPY* 93.99 93.50 96.00
NZD* 1.100 1.090 1.070
NZ Dollar USD* 0.832 0.780 0.748 Mixed. We expect NZD to outperform AUD but lose ground against USD in a
broad USD strength environment. We see modest scope for interest rate
spreads to move further in NZD favor. In addition, further support for NZD in
2014 will likely come from increased migration flows, and a boost in dairy
exports following China’s easing of its one-child policy.
JPY* 85.47 85.78 89.72
Scandinavia
Swedish Krona EUR 8.998 9.100 9.200 Bearish. The recovery is underway but slowly. Low price pressures and
macroprudential measures should keep Riksbank dovish for an extended
period. Weaker FX would be welcome but the current account surplus is
high and flow support may delay such an adjustment.
USD 6.529 6.947 7.419
Norwegian Krone EUR 8.414 8.450 8.600 Bearish. The outlook for weaker investment growth, cooling household
consumption and falling house prices are key concerns. Reliance on non-
core exports may require further currency depreciation. Meanwhile, Norges
Bank is likely to remain dovish for a prolonged period.
USD 6.112 6.450 6.935
SEK* 1.068 1.077 1.070
Emerging Europe, Middle East and Africa
Czech Koruna EUR 27.44 27.50 28.00 Neutral. At this moment a period of wait-and-see is likely, but we expect
deflationary pressure to require further steps and possibly increase of the
floor further down the line. In the meantime, CZK is likely to play the role of
a funding currency for the region.
Hungarian Forint EUR 300.9 305.0 310.0 Bearish. We see increasing risk of further dovish innovations from the
central bank including possibly an extension of the FGS scheme. The
easing steps so far have substantially reduced front end carry leaving HUF
more vulnerable to risk-off periods.
Polish Zloty EUR 4.18 4.15 4.10 Bullish. Growth pick-up, non-dovish central bank, and cheap valuation
leave us bullish on PLN. The pension reform may be an obstacle to gains,
but we recommend buying on any such related PLN dips.
Israeli Shekel USD 3.49 3.55 3.55 Neutral. The potential for appreciation has fallen, and we expect two further
rate cuts in 2014. Risks for capital control measures and resident outflow
incentives also remain open, and the M&A support is now dwindling.
18 December 2013
FX Compass: The Final Countdown 14
Regional Currencies vs.
Spot
17 Dec 2013
Forecasts
Comments 3m 12m
Russian Rouble Basket 38.2 39.0 40.5 Bearish. Structural growth weakness and the high fiscal deficit suggest
Russia needs a weaker RUB over time. Recent changes to the intervention
mechanism and shift to free float increasingly enable such a trend. Rouble versus basket: USD 32.7 34.2 36.6
.55*USD+.45*EUR EUR 45.0 44.8 45.3
South African Rand USD 10.34 10.60 11.00 Bearish: Further deterioration in both the balance of payments and in the
fiscal numbers are likely, in our view, opening the door to credit rating
downgrades. With elections looming, the potential for political risk is high. EUR 14.23 13.89 13.64
Turkish Lira Basket 2.41 2.50 2.55 Bearish. The large current account deficit as well as the growth focus of the
central bank leave lira vulnerable to further weakness in the current
environment, in our view. A renewed push higher in US yields may be a
catalyst.
Lira versus basket: USD 2.03 2.16 2.28
.50*USD+.50*EUR EUR 2.79 2.84 2.82
Asia
Chinese Renminbi USD 6.07 6.10 6.07 Bullish. China’s BoP surplus has risen sharply and its trade surplus with
the US has hit a record level. We continue to expect the government to
widen the trading bands for spot around the fix from the current 1% per side
to 1.5%–2.0% in the next several months.
Indian Rupee USD 61.0 62.0 65.5 Tactically Bullish. We expect positive seasonality in India’s current
account balance in Q1 to combine with improving economic growth and
now stronger external liquidity to lead the INR to outperform in Q1..
Indonesian Rupiah USD 11920 12200 12350 Bearish. Monetary policy still appears to us to be a bit too loose for IDR
stability and Bank Indonesia (BI) does not plan to tighten further.
Korean Won USD 1052 1075 1100 Neutral. Korea’s current account surplus should weaken seasonally in Q1.
Additionally, the rise in USDJPY we expect is likely to lead to capital
outflows from Korea..
Malaysian Ringgit USD 3.21 3.28 3.35 Bearish. MYR will likely underperform in a broad USD strength
environment we expect. While the current account has stabilized, MYR
remains vulnerable to capital outflow given large foreign overweight in its
local debt market.
Philippines Peso USD 44.3 44.3 44.5 Bearish. Negative carry and central bank resistance to currency
appreciation make PHP an ideal funding currency for the region, in our
view. We expect current account to deteriorate in 2014 as domestic
demand picks up and reconstruction begins post the recent typhoon.
Singapore Dollar USD 1.249 1.275 1.295 Neutral. We expect Singapore’s central bank (MAS) to maintain the current
appreciation path for the SGD nominal effective exchange rate. We
estimate the appreciation slope to be 2.5%pa with 1.5% bands on either
side of the center of the bands.
Taiwan Dollar USD 29.60 29.80 29.90 Neutral/Bearish. Taiwan’s central bank should continue to manage
volatility on both sides. Our forecasts imply the TWD will outperform KRW
slightly.
Thai Baht USD 32.07 32.80 33.20 Moderately Bearish. Political uncertainty is likely to persist in the months
ahead. Portfolio outflows have started rising and the current account
remains insufficient to support the THB in the near term. Given THB REER
remains expensive despite recent correction, with downside risk to growth
and low inflation, the BoT will likely prefer a weaker THB, in our view.
Exchange rates are home currency per foreign currency unit, unless indicated by * (= inverse quotation). Source: Credit Suisse
GLOBAL FIXED INCOME AND ECONOMICS RESEARCH
Ric Deverell Eric Miller,
Global Head of Product Research Co-Head, Securities Research & Analytics +44 20 7883 2523 +1 212 538 6480
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