|EUR vs model (spread in P2)|
Observation period was 2012 -> end of 2013. So far YTD, the EURUSD has been within 200 pips of my model (but given the YTD range is tiny, not that impressive) - Right now, it seems fairly priced against the cross asset components.
Using my 1Y forecasts for my components are calculating where my model would be, given that risk premia is likely plateauing, and short end US-EU rates are diverging, my model sees 1.2982 (range of 1.32/1.278)
|AUD vs model (spread in P2)|
Unlike many, I don't actually include Copper prices (or other commodities) into my model, instead I stick with, at least in our current dynamic, having short end rate spreads, EM credit spreads, US 10 year yield and implied volatility.
Observation period was 2013, and while quite divergent at the beginning of this year, they've finally come together.
Once again looking forward, I expect to see 10Y US rates edge higher toward 3%, US 2's to pick up another 30-50bps, and implied volatility to tick up marginally (mean reversion). While EM credit spreads staying constant (measured via CDX 5Y EM - CDX 5Y IG)
Therefore, an approximate value of around 0.865 is seen. Which given other factors does seem reasonably fair to me.
|GBP vs model (spread in P2)|
All in all, this is quite a different model, but still working well. A slight divergence in the past two weeks as UK short end rates have given back some of their gains. The observation period was again 2013.
Given the path for the majority of these factors, I don't see *that* much upside in the GBP vs the USD. It might continue higher in the shorter term, but in 1Y time, I would be surprised to see us above 1.70.
|CAD vs model (spread in P2)|
So with regard to my current trade, I am looking for a move back into the 1.09s eventually.
So that was a look at some of my models, now for some of my thoughts for the next week and ahead.
This next section involves looking at the USDJPY and UST's, something I have done many times before.
I'm definitely on the side of wanting to pay US rates at these levels, the US 10Y is at 2.52% and I still do think we head higher. One negative however is the carry one has to pay. A 3 month fwd, 10Y swap trades at around 2.7% (or +15bps), and so one way I am looking at avoiding paying this cost is to use the USDJPY as a proxy long for US rates.
On top of this, you would recieve 6pips from being long the USDJPY over a similar 3 month period, so instead of negative carry, its positive!
Now this is not at all a new theme, could have interchangeably used them all year, but I am very much liking the fundamentals behind paying rates, so the timing seems right for me now.
|USDJPY vs US10's (red)|
However, this may all be too good to be true. One major risk, and it is quite major, is the positioning in USDJPY and the enormous vacuum that lay just below market.
A 3 month USDJPY 102 (40 delta) call costs about 88 pips right now, and given historically low levels of vol this maybe the most attractive play to me. But maybe if you ask BNP Paribas they could suggest something a little bit more exotic :)
|USDJPY 40 delta call volatility|
Anyway, we've got a busy week ahead of us in the G10 space;
- The odd Draghi speech
- RBA + BoJ on Tuesday morning (probably same old boring rhetoric)
- UK CPI, est for 1.6% vs 1.5% prior. Quite an important print imo. carney speaks aswell
- ZEW (I pronounce it Zoo in my head...) but frankly meh
- BOC statement / conference. (poloz language wrt CAD is key, likely dovish still)
- UK employment data, my only concern is can it live up to expectations...
- US CPI / Consumer sentiment on friday, but frankly meh.