Saturday, 16 November 2013

What We Learned From Trading Major Currencies In 2013? - Nomura

"Lesson #1: Take the long view on big policy shocks.

The market learns quickly, and the type of news that gets repeated tends to be digested by the market essentially instantly (think about the monthly NFP release). Big policy shocks are different. For about a year, we have been digesting the true content and implications of “Abenomics”. The lesson has been that the really big (one-off) policy shocks can create trends lasting multiple months as the market only gradually buys into a new secular theme. In this situation, trends can last several quarters and potentially years.

An application of this lesson is the current wave of better eurozone sentiment, where we are recognizing that after a three-four year bear-wave, the greater optimism may last for a sustained period of time. Hence, we have generally been in no rush to implement short Euro trades.

Lesson #2: Relationships between FX and rates are complex:

An important lesson from 2013 has been that not all yield moves are created equal in relation to FX. This lesson is, obviously, not entirely new. It has always been the case that yield moves caused by sovereign risk and/or inflation concerns were negative for FX, while moves caused by policy tightening and/or higher growth were positive.

Obviously, it is hard to say for sure during which specific periods a rise in yields will be viewed in the context of a structural turning point. But given the very low level of yields currently, it is possible that this will remain the case into 2014. As such, we may need to see a rise in short US rates in order for the USD to benefit on a global basis. As such, batches of temporary spikes in the 10-year rate will not necessarily translate into USD broad-based gains

Lessons #3: Growth forecasting based on extrapolating the past is risky:

It is tempting to anchor forecasts of future GDP growth on prior observations. As the market misjudges future GDP growth by anchoring too heavily on prior observations, we believe there will be opportunity based on misaligned expectations. We believe that these opportunities will likely manifest themselves in the forms of both upside and downside surprises.

Opportunities for upside surprise, we believe exist in the United States and United Kingdom. On the other hand, we believe that the market is overestimating the strength of the recovery in the eurozone. Consensus is now for 1% growth in 2014, while last year consensus was for just marginally positive growth in 2013."

Jens Nordvig - Nomura 

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