The first idea was to sell AUD/CAD. The thinking was that, while BarCap is overall positive on China, there are uncertainties regarding the path of monetary policy, which makes AUD vulnerable. Additionally, they thought that any larger or more immediate renminbi move than currently anticipated would hit AUD. The BarCap people also anticipated a “rotation of growth surprises” from Asia to North America from which CAD would benefit. Both AUD and CAD are commodity currencies, and neither is a significant exporter to Europe.
The second trade was also AUD-related but from an options angle. One-year AUD/USD vol., said BarCap, has been oversold over the last few months – down from 17.5% to 13%. GBP/USD one-year volatility is also around 13% but only down from 14.5% in December. Very seldom has one-year AUD/USD vol. been less than cable vol. Yet again the idea of complacency over Asian/Australian growth was mooted, along with concerns that the UK election result may be overdone. It was suggested that the trade be put on either via a volatility swap or, against the USD, buying 25-delta AUD puts and selling 25-delta GBP puts. I’m not quite so sure about the latter proposal, but the BarCap bods pointed out that the risk reversals (currently approximately 3% for both pairs, favouring the downside) historically show a tendency to blow out more in AUD/USD than cable, which helps the trade.
The third BarCap idea was my favourite: go short EUR/TRY – but then you read that here some time ago. The factors highlighted were Turkish fiscal sustainability, low leverage and loan/deposit ratios in the banking sector, strong domestic demand and expected GDP growth this year of five times that of the eurozone. The possible negatives were seen as a widening current account deficit (which would be mitigated by increased capital inflows, for which there is some evidence) and the political situation, which the panel saw as contained. The target for the trade was 1.8000 over the next six months, which would be a nice pick-up – six month EUR/TRY is around 2.0200 with the current spot at 1.9550.
The final two trades didn’t resonate well with me, but, for the record, they were to sell CHF/SEK (which would immediately have got hurt on Thursday morning by the SNB’s erratic behaviour, see FX comment: SNB before ECB) and to be long of ZAR/CZK, mainly for reasons of carry and comparative projected growth, backed up with positive technicals.