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Foreign Exchange

FX research roundup: EUR/USD to below parity but what best to short against CHF?

BNP Paribas came out with an FX special note on Thursday night the essence of which is in the first two sentences:

“Despite this week’s rebound we have revised our EURUSD projections lower once again. So far, we had expected EURUSD to hit parity in Q1 2011, followed by a gradual rebound of the EUR. Now we are convinced that EURUSD will have to remain weaker for longer and we expect it to drift to 0.97 in Q3 2011.”

Rate-wise this is a little ‘manic precision’ for me – 0.9700 is the same as parity when you are sitting at 1.2400 – but the main point is that BNP is un-impressed by the five-big figure bounce, still sees it lower, and for a longer time than previously.

Commerzbank are also bears, which is slightly unusual – Commerz’s analysis often appears, and this is only my reading of it, to have a slightly euro-bullish bias to it. But not this week. On Tuesday, the German bank surveyed the landscape and concluded with nothing but euro negatives: “Even the significant austerity efforts on the part of Spain and Portugal are not sufficient. They will not prevent the debt levels of the two countries from rising at increasing speed indefinitely.” Additionally, continuing contradictory comments from the EU on the debt situation means that “EUR-USD shorts remain justified”, which, as I say, is pretty bearish for Commerzbank.

So, after Thursday’s announcement that the Swiss National Bank had formally raised the interventionary white flag it would look like short EUR/CHF should be the trade and certainly, at 1.3750 on Friday morning, the market is probing the lows. But Derek Halfpenny at Bank of Tokyo-Mitsubishi UFJ thinks short AUD/CHF is worth investigating. Halfpenny sees “some evidence that growth is starting to slow in Australia. The Westpac leading index of economic activity fell from 1.0% in March to unchanged in April, the biggest drop since the Lehman Brothers collapse”. However the carry of short AUD is distinctly unfavourable.

Halfpenny recommends “selling AUD/CHF with a target of 0.8750, equating to a potential return of just under 10%. An obvious stop is just above parity, or for those willing to take on greater risk, just above the most recent intra-day high of 1.0155 recorded in May.”

I suppose the key question is: if I were happy with a short EUR/CHF position, crowded though it is, would I want to put on a short in AUD/EUR?

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