17 Jun 2014
Bullish on FX carry trade - SocGen
FXStreet (Bali) - The Societe Generale FX Team continues to stay bullish on the FX carry trade, given upbeat risk sentiment and Fed policy set to stay easy for longer.
Key Quotes
"We look forward to reducing exposure this autumn however, as Fed QE comes to an end and investors look forward to the next step of the exit strategy (rate hike). That’s when 10yT yields, and rates vols along with them, will rise."
"In all, for now we continue to run the carry trade selectively (with a valuation filter). Six months ago our favourite carry basket was long USD, NOK and GBP vs JPY, CHF and EUR. This has delivered positive returns (about 5% annualised)."
"The basket would have performed much better with longs in AUD and NZD, but we chose currencies that weren’t stretched from a valuation perspective."
"In this spirit, applying the same principle to the funding side of the basket, we now replace JPY with SEK and end up with a long USD, NOK4 and GBP vs CHF, SEK4 and EUR basket."
"This basket delivers positive carry and takes advantage of monetary policy de-synchronisation, with the CHF, SEK and EUR now figuring prominently in the currency war ranking, given the ongoing ‘lowflation’ problem in those economies."
Key Quotes
"We look forward to reducing exposure this autumn however, as Fed QE comes to an end and investors look forward to the next step of the exit strategy (rate hike). That’s when 10yT yields, and rates vols along with them, will rise."
"In all, for now we continue to run the carry trade selectively (with a valuation filter). Six months ago our favourite carry basket was long USD, NOK and GBP vs JPY, CHF and EUR. This has delivered positive returns (about 5% annualised)."
"The basket would have performed much better with longs in AUD and NZD, but we chose currencies that weren’t stretched from a valuation perspective."
"In this spirit, applying the same principle to the funding side of the basket, we now replace JPY with SEK and end up with a long USD, NOK4 and GBP vs CHF, SEK4 and EUR basket."
"This basket delivers positive carry and takes advantage of monetary policy de-synchronisation, with the CHF, SEK and EUR now figuring prominently in the currency war ranking, given the ongoing ‘lowflation’ problem in those economies."