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Foreign Exchange

FX research roundup: Turkey flies high, Greece skids again, CAD is a bounder (to parity)

Last week I asked if a short EUR/TRY trade made sense. I wasn’t suggesting a tradable move over the following week, but the market answered with a resounding yes.

FX research roundup: not Christmas but is it time for Turkey?

April 01, 2010



Obviously, some of the 3% move (from 2.0520 last Thursday to 1.9900 this morning) was due to EUR weakness, but USD/TRY is also off more than 2%. Turkey’s better than expected GDP (a 6.0% increase year-on-year in the fourth quarter, bringing the 2009 contraction to 4.7%); the national-100 main Istanbul share index making a new high; and Ulrich Zachau of the World Bank predicting an increase of 6% in 2010 GDP were all to the benefit of the TRY.

However, Turkey isn’t a big market story in the quietest of times; the week’s spotlight was again on Greece, with a torch being shone in the direction of CAD.

Financial Times’ columnist Wolfgang Münchau started the week reasoning that eventual Greek default was unavoidable:

“To get out of this mess, one of five things will have to happen. The first, and most optimistic, solution would be a significant fall in the euro’s exchange rate, say to parity with the US dollar, coupled with a strong recovery in the eurozone. This might just do the trick to sustain Greek growth as it adjusts. The second is that Greece gets access to low interest rate loans from the European Union and the International Monetary Fund. The third would be a private sector debt restructuring to prevent a Fisher-style debt-deflation dynamic. The fourth is that Greece leaves the eurozone. The fifth is default. If you go through the options one by one, you realise that the first is improbable. The EU has in effect ruled out the second. The third would require an unlikely additional bail-out of the European banks. While option four would be most convenient for the Germans, the Greeks are not so stupid as to leave the eurozone. That leaves them with option five: to default inside the eurozone. It is the only option that is consistent with what we know.”  

Nicely said, but the probability of a move to parity could be taken a little more seriously. And will be as option five becomes clearer in people’s minds.

Incidentally, Citi’s global macro strategy paper published April 8, Productivity, the dollar and equities, highlights the surge in US productivity, relative to the eurozone, since the start of the recession. It’s an interesting paper throughout, but I’ll skip to the conclusion: “History supports the view that a relative productivity shock will lead to US dollar appreciation versus the euro... Using a productivity differential to exchange rate beta of four from recent academic work suggests a 16% decline i.e. to around EUR/USD 1.1400”.

And then factor in the Club Med difficulties and the attendant constraints on ECB tightening; yes, a move to parity should be taken a little more seriously.

Talking of which, CAD achieved parity with USD this week; the question is where from here? RBC looks for 0.9867 if we see a daily close below 0.9977 although it recognises that momentum is slowing. BNP Paribas will have taken some profit around 1.0000 but remains short targeting 0.9800. BNP’s target is probably more precisely 0.9820 – its short term trading strategy suggests buying USD/CAD at that level, stop at 0.9720, target 1.0020. Now that parity has been achieved, BNP is more confident in its short USD/CAD vega position than the spot position – even though one-year implied is off a vol since the beginning of March.

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