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... from IDEApro Suite

[MKT] FX Strategy - Risk positive reaction to Fed


The European morning saw sharp gains for the NOK as Norges Bank left rates unchanged, though the fact that they further reduced their expectations of the future path of rates should limit the upside for the NOK. EUR/NOK fell around 2% on the news, but we would expect it to hold above 9.40 in the absence of a significant recovery in the oil price. The risk positive tone in the European morning may also have helped the NOK, but the oil price remains close to its lows so we would be wary of assuming the NOK will be a major beneficiary of risk positive sentiment.

A more likely candidate for that is GBP. UK retail sales showed a much stronger than expected rise in November, but the GBP reaction appears to have been complicated by a rumour/leak of the data which saw GBP climb before the numbers and sell off after. However, GBP is likely to perform relatively well against the CHF, JPY and EUR in this more risk positive environment, and suggests GBP might be an attractive buy on the dip seen after the data.

The European morning also saw the IFO data from Germany, which was very slightly on the weak side of expectations, and Swedish unemployment, which came out much lower than expected. Sweden continues to look like the strongest European economy - indeed, probably the strongest developed market economy - and suggests the SEK should be attractive medium term in spite of the Riksbank's opposition to significant SEK gains. EUR/SEK fell on the release of the data, but has now bounced back to opening levels

Elsewhere, the markets will no doubt continue to react to the aftermath of the Fed. Our core view is that the Fed rate rise will ultimately be USD supportive, and USD/CHF is our favoured vehicle, though GBP/USD may also be an attractive sell. While GBP/USD is on the low side compared to recent years, it's not really as low as it looks, as UK CPI has risen around 10% more than US CPI since 2008, so in 2008 prices GBP/USD is equivalently around 1.65. However, the initial reaction to the Fed has been slightly risk positive, so we would favour long risk positions, but not necessarily USD longs at these levels, as there has been no significant rise in US yields or spreads in favour of the USD thus far beyond the front end of the curve. So long cross risk positions - e.g EUR/CHF - look the most attractive.



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