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Highlights The pillars of dollar support continue to fall, but the missing catalyst is visibility on the trajectory of global growth. For now, we remain constructive on the DXY short term, but bearish longer term. Market internals and currency technicals have become supportive of pro-cyclical trades in recent days. There is tremendous value in the Norwegian krone, Swedish krona and British pound. Buy a basket of NOK and SEK against a basket of USD and EUR. Feature Markets are getting some semblance of calm after being flooded with vast amounts of monetary and fiscal stimulus. The DXY index, having breached the psychological 100 level, failed to break above 103, and is now in a volatile trading pattern of lower intra-day highs. The message is that the Federal Reserve’s injection of liquidity, along with generous USD swap lines for major central banks, has eased the funding crisis (Chart I-1).1 All eyes will now begin to focus on fiscal support, especially from the US. As we go to press, US leaders have agreed to a $2 trillion fiscal package. As we highlighted last week, a central bank cannot do much about an economy in a liquidity trap, but governments can step in and be spenders of last resort. While fiscal stimulus is a welcome catalyst, the impact on the economy is likely to be felt a bit later. More importantly, until the number of new Covid-19 cases peak, the global economy will remain in shutdown, and visibility on the recovery will be opaque (Chart I-2). This provides an air pocket in which the dollar can make new highs, especially if the slowdown is not of a garden variety, but a deep recession. Chart I-1A Shortage Of Dollars Chart I-2Some Reason For Optimism We continue to monitor the behavior of market internals and currency technicals to gauge a shift in market dynamics. Both liquidity and valuation indicators are USD bearish, but as a momentum currency, the dollar will benefit from any signs we are entering a more protracted slowdown. In this report, we use a simple framework for ranking G10 currencies – the macroeconomic environment, valuation and sentiment. There has been a tectonic shift in currency markets over the last few weeks which has uncovered some very compelling opportunities. This is good news for investors willing to stomach near-term volatility. In short, we like the pound, Swedish krona and Norwegian krone. Are Policy Actions Enough? Chart I-3The Dollar And Interest Rates Diverge There has been an unprecedented wave of monetary and fiscal stimulus announced in recent weeks.2 This should eventually backstop economic activity. Below we highlight a few key developments, along with our thoughts. USD: The Fed has cut interest rates to zero and announced unlimited QE. As we go to press, a $2 trillion fiscal package has been passed. This represents a much bigger monetary and fiscal package compared to the 2008 Great Recession. The near-term impact will be to boost aggregate demand, but the massive increase in the supply of dollars should lower the USD exchange rate. As a rule of thumb, lower interest rates in the US have usually been bearish for the currency (Chart I-3). EUR: The European central bank has announced a €750 billion package effectively backstopping the peripheral bond market. The good news is that the structural issues in the periphery are much less pronounced than during the 2010-2011 crisis. This is positive for the euro over the longer term, as cheaper funding should boost capital spending and productivity. GBP: The Bank of England has cut interests to almost zero and expanded QE. Meanwhile, there has been an intergenerational shift in the pound. The lesson from the imbroglio in British politics since 2016 is that cable at 1.20 has been the floor for a “hard Brexit” under normal conditions. This makes the latest selloff an indiscriminate liquidation of the pound. On a real effective exchange rate-basis, the pound is close to two standard deviations below its mean since 1965. On this basis, only two currencies are cheaper: the Norwegian krone and Swedish krona. AUD: The Reserve Bank Of Australia cut interest rates to 25 basis points and has introduced QE. The Aussie is now trading below the lows seen during the Great Financial Crisis. This suggests any shock to Aussie growth will have to be larger than 2008 to nudge the AUD lower. CAD: The Bank Of Canada has cut rates to 75 basis points and introduced a generous fiscal package. More may be needed if the downdraft in oil prices persists beyond the near term. We highlighted a few weeks ago how the landscape was rapidly stepping into one of competitive devaluations.3 We can safely assume that we are already into this zone. One end result of competitive devaluations is that as interest rates converge to zero, relative fundamentals resurface as the key drivers of currency performance. In short, the last few weeks have seen long bond yields converge in the developed world (Chart I-4). That means going forward, picking winners and losers will become as much a structural game as a tactical one. From a bird’s eye view, below are a few key indicators we are monitoring.  Chart I-4The Race To Zero G10 Basic Balances Chart I-5CHF, EUR, AUD and NOK Are Supported The basic balance captures the ebb and flow of demand for a country’s domestic assets. Persistent basic balance surpluses are usually associated with an appreciating currency, and vice versa. This is especially important since the rise in offshore dollar funding has been particularly pernicious for deficit countries. Switzerland sports the best basic balance surplus in the G10 universe, followed by the euro area, Australia and then Norway (Chart I-5). Surpluses imply a constant underlying demand for these currencies - either for domestic goods and services or for investment into portfolio assets. The UK and the US rank the worst in terms of basic balances. As for the UK, the basic balance deficit explains why the recent flight to safety hit the pound particularly hard. Net International Investment Position Both Switzerland and Japan have the largest net international investment positions. These tend to buffet their currencies during crises, since foreign assets are liquidated and the proceeds repatriated home. This is at the root of their status as safe-haven currencies. There has been structural improvement in most G10 net international investment positions, especially compared to the US (Chart I-6). Should the returns on those foreign assets be sufficiently high, this will lead to income receipts for surplus countries, providing an underlying boost for their currency. Chart I-6Structural Increase In G10 NIIP Interest Rates The race to the zero bound has pushed real interest rates into negative territory for most of the developed world. This has also greatly eroded the yield advantage of the US dollar against its G10 peers (Chart I-7). Within the G10 universe, the commodity currencies (Aussie, kiwi and loonie) have become the high yielders in real terms. This yield advantage should help stem structural depreciation in their currencies. Chart I-7Most Of The G10 Has Negative Real Rates Valuation Models One of our favored valuation models for currencies is the real effective exchange rate. The latest downdraft in most G10 currencies has nudged them between one and two standard deviations below fair value (Chart I-8A and Chart I-8B). According to the BIS measure, the Norwegian krone and Swedish krona are currently the cheapest currencies, with the krone trading at more than three standard deviations below its mean fair value. Chart I-8ASome G10 Currencies Are Very Cheap Chart I-8BSome G10 Currencies Are Very Cheap Most importantly, despite the recent rise in the US dollar, it is not yet very expensive. The trade-weighted dollar will need to rise by 8% to bring it one standard deviation above fair value. This was a definitive top in the early 2000s. This rise will also knock the euro lower and push many pro-cyclical currencies into bombed-out levels, making them even more attractive over the long term. Chart I-9NOK and SEK Are Deeply Undervalued Other valuation measures corroborate this view: Our in-house purchasing power parity (PPP) models show the US dollar as only slightly overvalued, by 7%. These models adjust the CPI baskets across countries so as to get closer to an apples-to-apples comparison. The cheapest currencies according to the model are the SEK, NOK, AUD and GBP (Chart I-9). The yen is more attractive than the Swiss franc as a safe-haven currency. Our intermediate-term timing models (ITTM) show the dollar as fairly valued. The main ingredients in these models are real interest rate differentials and a risk factor. On a risk-adjusted return basis, a dynamic hedging strategy based on our ITTMs has outperformed all static hedging strategies for all investors with six different home currencies since 2001. According to these models, the Australian dollar and Norwegian krone are the most attractive currencies, while the Swiss franc is the least attractive. Our long-term FX models are also part of a set of technical tools we use to help us navigate FX markets. Included in these models are variables such as productivity differentials, terms-of-trade, net international investment positions, real rate differentials, and proxies for global risk aversion. These models cover 22 currencies, incorporating both G10 and emerging market FX markets. According to these models, the US dollar is at fair value (mostly against the euro), but the yen, the Norwegian krone and the Swedish krona are quite cheap. In a forthcoming report, we will show how valuation can be used as a tool to enhance excess returns in the currency space. For now, the universal message from our models is that the cheapest currencies are the NOK, SEK, AUD and GBP. Speculative Positioning Chart I-10Speculators Have Been Taking Profits Our favorite sentiment indicator is speculative positioning. More specifically, positioning is quite useful when it is rolling over from an overbought or oversold extreme. Being long Treasurys and the dollar has been a consensus trade for many years now (Chart I-10). According to CFTC data, this has been expressed mostly through the aussie and kiwi, although our bias is that the Swedish krona and Norwegian krone have been the real victims. The key question is whether the unwinding of dollar long positions we have seen in recent days reflects pure profit-taking, or represents a fundamental shift in the outlook for the greenback. Our bias is the former. Net foreign purchases of Treasurys by private investors have reaccelerated anew. Given the momentum of these purchases tends to be persistent over a six-month horizon, it is too early to conclude that dollar gains are behind us. That said, speculative positioning has also uncovered currencies in which investor biases are lopsided. This includes the Australian and New Zealand dollars. Currency Rankings And Portfolio Tweaks The depth and duration of the economic slowdown remain the primary concern for most investors. Should the world economy see a more protracted slowdown than in 2008, then more gains lie ahead for the greenback. This is on the back of a currency that is not too expensive, relative to history. That said, there have been a few currencies that have been indiscriminately sold with the global liquidation in risk assets. These include the Norwegian krone, the British pound and the Swedish krona, among others. To reflect the fundamental shift in both valuation and sentiment indicators, we are buying a basket of the Scandinavian currencies against a basket of both the dollar and euro. Finally, our profit targets on a few trades were hit, and we were stopped out of a few. Please see our trading tables for the latest recommendations. Appendix Table I-1 Chester Ntonifor Foreign Exchange Strategist chestern@bcaresearch.com Footnotes 1 Please see Foreign Exchange Strategy Weekly Report, titled “The Dollar Funding Crisis”, dated March 19, 2020, available at fes.bcaresearch.com. 2 Please refer to Appendix Table 1.  3 Please see Foreign Exchange Strategy Weekly Report, titled “Are Competitive Devaluations Next?”, dated March 6, 2020, available at fes.bcaresearch.com. Currencies U.S. Dollar Chart II-1USD Technicals 1 Chart II-2USD Technicals 2 Recent data in the US have been negative: The Markit manufacturing PMI dropped to 49.2 while the services PMI tanked to 39.1 from 49.4 in March. Initial jobless claims hit 3.3 million, a record high, in the week ended March 20. Nondefense capital goods orders, excluding aircraft, shrank by 0.8% month-on-month in February. The DXY index depreciated by 2.6% this week. The US Senate passed a $2 trillion economic relief package, which is now pending approval by the House. The bill includes direct payments to individuals, US$350 billion in loans to small businesses and investments in medical supplies. The Fed has created a backstop for investment grade bonds by vowing to purchase as many securities as needed to prop up the market. Report Links: The Dollar Funding Crisis - March 19, 2020 Are Competitive Devaluations Next? - March 6, 2020 The Near-Term Bull Case For The Dollar - February 28, 2020 The Euro Chart II-3EUR Technicals 1 Chart II-4EUR Technicals 2 Recent data in the euro area have been negative: ZEW economic sentiment crashed to -49.5 from 10.4 while consumer confidence fell to -11.6 from -6.6 in March. The Markit manufacturing PMI decreased to 44.8 from 49.2 while the services PMI tumbled to 28.4 from 52.6 in March. This pulled the composite index down to 31.4 from 51.6 in March. The current account increased to EUR 34.7 billlion from EUR 32.6 billion while the trade balance fell to EUR 17.3 billion in January. The euro appreciated by 2.4% against the US dollar this week. ECB President Lagarde argued for the one-off issuance of “coronabonds,” a shared debt instrument among member economies that pools risk and lowers lending costs for the more indebted nations affected by the pandemic.  Report Links: On The DXY Breakout, Euro, And Swiss Franc - February 21, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 On Money Velocity, EUR/USD And Silver - October 11, 2019 Japanse Yen Chart II-5JPY Technicals 1 Chart II-6JPY Technicals 2 Recent data in Japan have been negative: The Jibun bank manufacturing PMI fell to 44.8 from 47.8 in March. The coincident index increased to 95.2 from 94.4 while the leading index fell to 90.5 from 90.9 in January. Imports shrank by 14% while exports shrank by 1% year-on-year in February. The Japanese yen appreciated by 0.9% against the US dollar this week. As expected, the Tokyo Olympics were postponed, striking a further blow to economic activity and the tourism sector. The government is considering a JPY 56 trillion stimulus package that includes cash payments to households and subsidies for small businesses, restaurants and other tourist-related sectors. Report Links: The Near-Term Bull Case For The Dollar - February 28, 2020 Building A Protector Currency Portfolio - February 7, 2020 Currency Market Signals From Gold, Equities And Flows - January 31, 2020 British Pound Chart II-7GBP Technicals 1 Chart II-8GBP Technicals 2 Recent data in the UK have been negative: The Markit manufacturing PMI declined to 28 from 51.7 while the services PMI collapsed to 35.7 from 53.2 in March. Retail sales contracted by 0.3% month-on-month in February from an increase of 1.1% in January. Headline CPI grew by 1.7% year-on-year in February. The public sector net borrowing deficit shrank to GBP 0.4 billion from GBP 12.4 billion in February. The British pound appreciated by 4.3% against the US dollar this week. The Bank of England (BoE) left rates unchanged at 0.1% and decided to continue purchases of UK government bonds and nonfinancial investment grade bonds, bringing the total stock to GBP 645 billion. The BoE has stated that it can expand asset purchases further if needed. Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 A Few Trade Ideas - Sept. 27, 2019 United Kingdom: Cyclical Slowdown Or Structural Malaise? - Sept. 20, 2019 Australian Dollar Chart II-9AUD Technicals 1 Chart II-10AUD Technicals 2 Recent data in Australia have been negative: The Commonwealth bank manufacturing PMI decreased slightly to 50.1 while the services PMI plunged to 39.8 from 49 in March. The house price index grew by 3.9% quarter-on-quarter from 2.4% in Q4. Unemployment decreased slightly to 5.1% in February. The Australian dollar appreciated by 5.1% against the US dollar this week. The government pledged an additional A$64 billion package, bringing total stimulus to 10% of GDP. The package includes assistance for individuals and small businesses impacted by the virus. Prime Minister Morrison said that more stimulus, including direct cash handouts to households, is likely to be announced over coming weeks. Report Links: On AUD And CNY - January 17, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 A Contrarian View On The Australian Dollar - May 24, 2019 New Zealand Dollar Chart II-11NZD Technicals 1 Chart II-12NZD Technicals 2 Recent data in New Zealand have been negative: Exports increased to NZD 4.9 billion, imports shrank to NZD 4.3 billion and the monthly trade balance showed a surplus of NZD 593 billion. Credit card spending grew by 2.5% in February from 3.7% the previous month. The New Zealand dollar appreciated by 4.2% against the US dollar this week. The RBNZ turned to quantitative easing and announced the purchase of up to NZ$30 billion of government bonds, at a pace of NZ$750 million per week. The government announced fiscal stimulus of just over NZ$12 billion that includes wage subsidies for businesses, income support, tax relief and support for the airline industry.     Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 Place A Limit Sell On DXY At 100 - November 15, 2019 USD/CNY And Market Turbulence - August 9, 2019 Canadian Dollar Chart II-13CAD Technicals 1 Chart II-14CAD Technicals 2 Recent data in Canada have been negative: Headline CPI grew by 2.2% year-on-year in February. Retail sales excluding autos fell by 0.1% month-on-month in January, compared to growth of 0.5% the previous month. Wholesale sales grew by 1.8% month-on-month in January from 1% the previous month. Jobless claims soared to 929 thousand in the week ended March 22, representing almost 5% of the labor force. The Canadian dollar appreciated by 2.8% against the US dollar this week. The government approved a C$107 billion stimulus package that includes payments of C$2,000 per month to individuals unemployed due to Covid-19 and C$55 billion in deferred tax payments for businesses and individuals. Report Links: The Loonie: Upside Versus The Dollar, But Downside At The Crosses Updating Our Balance Of Payments Monitor - November 29, 2019 Making Money With Petrocurrencies - November 8, 2019 Swiss Franc Chart II-15CHF Technicals 1 Chart II-16CHF Technicals 2 Recent data in Switzerland have been negative: Producer and import prices contracted by 2.1% from 1% year-on-year in February. ZEW expectations sank to -45.8 from 7.7 in March. Imports fell to CHF 15.7 billion from CHF 16 billion while exports fell to CHF 19.2 billion from CHF 20.7 billion in February. The Swiss franc appreciated by 1.6% against the US dollar this week. The Swiss government proposed stimulus worth CHF 32 billion, bringing total stimulus to 6% of GDP. The package will largely consist of bridge loans to small- and medium-sized businesses, social insurance and tax deferrals. The SNB also set up a refinancing facility to provide liquidity to banks. Report Links: On The DXY Breakout, Euro, And Swiss Franc - February 21, 2020 Currency Market Signals From Gold, Equities And Flows - January 31, 2020 Portfolio Tweaks Before The Chinese New Year - January 24, 2020 Norwegian Krone Chart II-17NOK Technicals 1 Chart II-18NOK Technicals 2 Recent data in Norway have been negative: The trade balance declined to 18.3 billion from 21.2 billion in February. Norwegian unemployment soared to 10.9% in March, the highest level since the Great Depression. The Norwegian krone appreciated by 7% against the US dollar this week. The Norges Bank cut rates from 1% to a record low of 0.25%, citing worsening conditions since the 50 basis point cut on March 13. Parliament approved loans, tax deferrals, and extra spending worth NOK 280 billion. The government expects private-sector activity to contract by 15-20% in the near-term. The government will likely need to draw on its sovereign wealth fund to finance spending. Report Links: Building A Protector Currency Portfolio - February 7, 2020 On Oil, Growth And The Dollar - January 10, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 Swedish Krona Chart II-19SEK Technicals 1 Chart II-20SEK Technicals 2 Recent data in Sweden have been negative: The producer price index contracted by 1.2% year-on-year in February, deepening from 0.4% the previous month. Consumer confidence dropped to 89.6 from 98.5 in March. The trade balance grew to SEK 13.2 billion from SEK 11.8 billion in February. The unemployment rate rose to 8.2% from 7.5% in February. The Swedish krona appreciated by 3.5% against the US dollar this week. The Swedish government bucked the lockdown strategy, choosing to keep businesses open during the pandemic. In addition, the government announced stimulus measures of up to SEK 300 billion, which includes relief for employees that have been laid off or taken sick leave. Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 Where To Next For The US Dollar? - June 7, 2019 Balance Of Payments Across The G10 - February 15, 2019 Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Limit Orders Closed Trades

Highlights The path of least resistance for the DXY remains up. The internal dynamics of financial markets remain constructive for the DXY. We explore more key indicators to complement the analysis in our February 28 report. Our limit buy on NOK/SEK was triggered at parity. We were also stopped out of our long petrocurrency basket trade, which we will re-establish in the coming weeks. Feature Riot points in capital markets usually elicit a swathe of differing views. But more often than not, the internal dynamics of financial markets usually hold the key to a sober view. Given market action over the past few weeks, we are reviewing a few of the key indicators we look at for guidance on buying opportunities as well as false positives. In short, it is a story of standing aside on the DXY for now, while taking advantage of a few opportunities at the crosses. Currency Market Indicators Chart I-1The Dollar Has Scope To Rise Further Many currency market signals continue to point to a higher DXY index for the time being. One of our favorite risk-on/risk-off pairs is the AUD/JPY cross. Not surprisingly, it tends to correlate very strongly with the dollar, which is a counter-cyclical currency. The AUD/JPY cross has consistently bottomed at the key support zone of 70-72 since the financial crisis. This defensive line held notably during the European debt crisis, China’s industrial recession, and more recently, the global trade war. The latest market moves have nudged it decisively lower (Chart I-1). This pins the next level of support in the 55-57 zone, at par with the recessions of 2001 and 2008. The yen appears headed towards 100. A rising yen is usually accompanied by a dollar rally against other procyclical currencies. Outside of the Fukushima crisis, this was a key indicator that the investment environment was becoming precarious (Chart I-2). We laid out our conviction last week as to why we thought 100 is the resting spot for the yen.1 That said, in our trades, our 104 profit target for short USD/JPY was hit this week. We are reinstating this trade with a target of 100, but tightening the stop to 105.4. Chart I-2The Yen Rally Usually Stalls At 100 The recent drop in the dollar is perplexing to most, but it fits the profile of most recessions we have had in recent history. As the world’s reserve bank, the Federal Reserve tends to be the most proactive during a crisis. This means US interest rates drop faster than in the rest of the world, which tends to pressure the dollar lower. Eventually, as imbalances in the economic system come home to roost, the dollar rallies (Chart I-3). 62% of global reserves are still in dollars, suggesting it remains the currency of choice in a crisis. Currencies such as the Norwegian krone and Swedish krona that were already quite cheap are still selling off indiscriminately. Granted, the Norwegian krone has been hit especially hard due to the fallout of the OPEC cartel. But the Swedish krona and Australian dollar that were equally cheap are selling off as well. This suggests the currency market is making a binary switch from fundamentals to sentiment, as we highlighted last week. Chart I-3The Dollar And ##br##Recessions Chart I-4Carry Trades: Long-Term Bullish, Short-Term Cautious Correspondingly, high-beta currencies such as the RUB/USD, ZAR/USD and BRL/USD are plunging into uncharted territory. These currencies are usually good at sniffing out a change in the investment landscape, specifically one becoming precarious for carry trades. The message so far is that the drop in US bond yields may not have been sufficient to make these currencies attractive again (Chart I-4). On a similar note, it is interesting that the USD/CNY is still holding near the 7-defense line. We suggested in a previous report that this represented a handshake agreement between President Xi and President Trump during the trade negotiations. Should USD/CNY break decisively above 7.15 (for example, if Trump’s reelection chances dwindle), it will send Asian currencies into the abyss. The velocity of asset price moves is both surprising and destabilizing. At this rate, previously solvent countries can rapidly step into illiquid territory, especially those with already huge levels of external debt. Granted, this is more a problem for emerging markets than for G10 currencies. So far, it is encouraging that cross-currency basis swaps for the dollar (a measure of currency hedging costs) remain muted (Chart I-5). Chart I-5Hedging Costs Remain Contained In a nutshell, the message from currency markets warns against shorting the DXY for now. Bottom Line: Our profit target on short USD/JPY was hit at 104 this week. We are reinstating this trade with a new target of 100 and a stop-loss at 105.4. Currency market dynamics suggest the DXY is headed higher in the near term. The Message From Equity And Commodity Markets Equity and commodity market indicators continue to suggest the path of least resistance for the DXY remains up over the next few weeks. Since the 2009 lows, the S&P 500 has respected a well-defined upward-sloped trend line, characterized by a series of higher highs and lows. Given this defense line has been tested (and broken), it could pin the S&P 500 around 2200-2400 (Chart I-6). A further drop of this magnitude is likely to unravel financial markets as stop losses are triggered and reinforced selling is supercharged. Non-US equity markets have a much higher concentration of cyclical stocks in their bourses. Thus, whenever cyclical sectors are underperforming defensives at the same time as non-US markets are underperforming US ones, it is a clear sign that the marginal dollar is rotating towards the US (in this case fixed income). During the latest downdraft, what has been clear is that cyclical (and non-US) markets have been underperforming from already oversold levels (Chart I-7A and Chart I-7B). As contrarian investors, we tend to view this development positively, but catching a falling knife before eventual capitulation can also be quite painful. Chart I-6A Break Below The Defense Line Is Bearish Chart I-7ANot A Bullish Configuration For Cyclical Currencies Chart I-7BNot A Bullish Configuration For Cyclical Currencies The 2015-2016 roadmap was instructive on when such a capitulation might occur. Even as the market was selling off, certain cyclical sectors such as industrials started to outperform defensives ones (Chart I-8). So far, it appears that selling pressure in cyclical markets have not yet been exhausted. Chart I-8Equity Market Internals Are Worrisome In commodity markets, the copper-to-gold and oil-to-gold ratios continue to head lower from oversold levels. Together with the fall in government bond yields, it signifies that the liquidity-to-growth transmission mechanism is impaired (Chart I-9). The speed and magnitude of the latest drop could signify capitulation, but since the European debt crisis there has been ample time to catch the upswings, since they tend to be powerful and durable. Earnings revisions continue to head lower across all markets. Bottom-up analysts are usually spot on about the direction or earnings. Not surprisingly, the downgrades have been driven by emerging markets, meaning that return on capital will be lower in cyclical bourses. Chart I-9Commodity Market Internals Are Worrisome A selloff in equity markets has tended to occur in cycles. The speed and intensity of the first selloff usually wipes out stale longs, especially those that bought close to the recent market peak. It is fair to assume with yesterday’s selloff that the process is near complete. The next wave comes from medium-term investors, making a judgment call on whether they are at the cusp of a recession. Unfortunately, this phase usually involves a cascading selloff with capitulation only evident a few weeks or months later. The fact that cheap and deeply oversold currencies like the Norwegian krone and Australian dollar are still falling suggests we are stepping into the second wave of selloffs. What remains peculiar about the dollar is that it continues to be whipsawed between relative fundamentals and sentiment. Bottom LIne: Equity market internals continue to suggest we have not yet hit a capitulation phase for pro-cyclical currencies. Stand aside on the DXY for now. On Interest Rates, The Euro, And Petrocurrencies Chart I-10The Bear Case For The US Dollar What remains peculiar about the dollar is that it continues to be whipsawed between relative fundamentals and sentiment. For example, interest rate differentials across much of the developed world have risen versus the dollar, in stark contrast with the drop in their exchange rates (Chart I-10). The risk is that as a momentum currency, a surge in the dollar triggers a negative feedback loop that tightens global financial conditions, reinforcing the same negative feedback loop. A few questions we have fielded this week have been in surprise to the rise in the euro. What has been remarkable is that the drop in Treasury yields has wiped out the carry from being long the dollar for a number of countries. For example, the German bund-US Treasury spread continues to collapse. The message is that at least initially, room for policy maneuvering remains higher at the Fed, which corroborates the market view of a disappointing European Central Bank meeting this week. A drop in oil prices is also a huge dividend on the European economy, which partly explains recent strength in the euro. Within this sphere of multiple moving parts, one key question is what to do with oil plays. Usually recessions are triggered by rising oil prices that impose a tax on the domestic economy. But rather, oil prices have fallen dramatically in recent weeks as the pseudo-alliance between Russia and OPEC appears to have broken down. Our commodity and geopolitical strategists believe that while some sort of resolution will ultimately be reached, the path of least resistance for oil prices in the interim is down, as market share wars are re-engaged.2 Risks to oil demand are now also firmly tilted to the downside. Oil demand tends to follow the ebb and flows of the business cycle. Transport constitutes the largest share of global petroleum demand, and the rising bans on travel will go a long way in curbing consumption (Chart I-11). Balance-of-payment dynamics also tend to deteriorate during oil bear markets. Altogether, these forces combine to become powerful headwinds for petrocurrencies. A fall in oil prices tends to be bullish for the US dollar. This is because falling oil prices reduce government spending in oil-producing countries, which depresses aggregate demand and leads to easier monetary policy. Meanwhile, a fall in oil prices also implies falling terms of trade, which further reduces the fair value of the exchange rate. Balance-of-payment dynamics also tend to deteriorate during oil bear markets. Altogether, these forces combine to become powerful headwinds for petrocurrencies. Chart I-11Oil Demand Will Collapse Further Chart I-12Resell CAD/NOK NOK Will Outperform CAD We were stopped out of our long petrocurrency basket trade for a small loss of 0.9% (on the back of a positive carry). We are standing aside on this trade for now. We were also stopped out of our short CAD/NOK trade which we are reinstating this week. Further improvement in Canadian energy product sales will require not only rising oil prices, but an improvement in pipeline capacity and a smaller gap between Western Canadian Select (WCS) and Brent crude oil prices. With the US shale revolution grabbing production market share from both OPEC and non-OPEC producing countries, the divergence between the WCS (and WTI) price of oil versus Brent is likely to remain wide (Chart I-12). Rebuy NOK/SEK Our limit buy on long NOK/SEK was triggered at parity this week. Relative fundamentals, especially from an interest rate perspective, still favor the cross. The cross has approached an important technical level, with our intermediate-term indicator signaling oversold conditions. Should the NOK/SEK pattern of higher lows and higher highs in place since the 2015 bottom persist, we should be on the cusp of a reversal (Chart I-13). Interest rate differentials continue to favor the NOK over the SEK (Chart I-14). Meanwhile, Norway mainland GDP growth continues to outpace that of Sweden. Chart I-13Rebuy NOK/SEK Rebuy NOK/SEK Chart I-14A Yield Cushion The risk to this trade is that we have not yet seen a capitulation in oil prices. This will largely be driven by geopolitics. But given that the cross is already trading near the 2016 lows in oil prices, this has already largely been priced in. We are placing a tight stop at 0.94 to account for volatility in the coming weeks. Housekeeping Our short CHF/NZD trade briefly hit our stop loss of 1.75. We are reinstating this trade today, with a new entry level of 1.74 and a stop-loss of 1.76. We were also stopped out of our short USD/NOK trade, and we will look to rebuy the krone in the near future. Chester Ntonifor Foreign Exchange Strategist chestern@bcaresearch.com Footnotes 1 Please see Foreign Exchange Strategy Weekly Report, titled “Are Competitive Devaluations Next?”, dated March 6, 2020, available at fes.bcaresearch.com. 2 Please see Commodity & Energy Strategy Special Report, titled “Russia Regrets Market-Share War?”, dated March 12, 2020, available at ces.bcaresearch.com. Currencies U.S. Dollar Chart II-1USD Technicals 1 Chart II-2USD Technicals 2 Recent data in the US have been positive: Nonfarm payrolls increased by 275 thousand and average hourly earnings grew by 3% year-on-year in February. The NFIB business optimism index ticked up to 104.5 in February. Core CPI grew by 2.4% year-on-year from 2.3% in February. The DXY index appreciated by 0.8% this week. Core inflation has consistently printed at or above 2% for the last two years, but with inflation expectations plunging to new lows, the February print is likely to mark an intermediate-term high in CPI. As a counter-cyclical currency, the DXY is likely to continue getting a bid in the near term, even if we get more aggressive stimulus from the Fed. Report Links: Are Competitive Devaluations Next? - March 6, 2020 The Near-Term Bull Case For The Dollar - February 28, 2020 On The DXY Breakout, Euro, And Swiss Franc - February 21, 2020 The Euro Chart II-3EUR Technicals 1 Chart II-4EUR Technicals 2 Recent data in the euro area have been mixed: GDP grew by 1% year-on-year in Q4 2019, from 0.9% in Q3. The Sentix investor confidence index plummeted to -17.1 from 5.2 in March. Industrial production grew by 2.3% month-on-month in January from a contraction of 1.8% in December. The euro appreciated by 0.5% against the US dollar this week. The European Central Bank (ECB) kept rates unchanged at its Thursday meeting but implemented measures that support bank lending to small and medium-sized enterprises and injected liquidity through longer-term refinancing operations. The ECB also introduced additional net asset purchases of EUR 120 billion until the end of the year. This will help ease financial conditions in the euro area, but until global demand picks up, the exodus of capital from cyclical European stocks could continue.   Report Links: On The DXY Breakout, Euro, And Swiss Franc - February 21, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 On Money Velocity, EUR/USD And Silver - October 11, 2019 Japanese Yen Chart II-5JPY Technicals 1 Chart II-6JPY Technicals 2 Recent data in Japan have been negative: The current account surplus increased to JPY 612.3 billion from JPY 524 billion while the trade balance went into a deficit of JPY 985.1 billion from a surplus of JPY 120.7 billion in January. Machine tool orders contracted by 30.1% year-on-year in February. The outlook component of the Eco Watchers survey plummeted to 24.6 from 41.8. The Japanese yen appreciated by 2.2% against the US dollar this week. An increase in foreign investments boosted the current account surplus, helping offset the deficit in goods trade. The government announced a package totaling JPY 430.8 billion to support financing for small businesses squeezed by the virus. The sharp rally in the yen could begin to garner discussions from both the MoF and BoJ on further actions. Report Links: The Near-Term Bull Case For The Dollar - February 28, 2020 Building A Protector Currency Portfolio - February 7, 2020 Currency Market Signals From Gold, Equities And Flows - January 31, 2020 British Pound Chart II-7GBP Technicals 1 Chart II-8GBP Technicals 2 Recent data in the UK have been negative: GDP growth was flat month-on-month in January. Industrial production contracted by 2.9% year-on-year in January, from a contraction of 1.8% the previous month. The total trade balance shrank to GBP 4.2 billion from GBP 6.3 billion in January. The British pound depreciated by 2.2% against the US dollar this week. The Bank of England (BoE) responded to the Covid-19 shock with an emergency rate cut of 50 basis points. This dovetailed with the government’s announcement of a GBP 30 billion stimulus package financed largely by additional borrowing. With the policy rate at 0.25%, the BoE has ruled out negative rates so further easing will likely come in the form of QE if rates go to zero. Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 A Few Trade Ideas - Sept. 27, 2019 United Kingdom: Cyclical Slowdown Or Structural Malaise? - Sept. 20, 2019 Australian Dollar Chart II-9AUD Technicals 1 Chart II-10AUD Technicals 2 Recent data in Australia have been negative: The Westpac consumer confidence index fell to 91.9 from 95.9 in February, a five-year low. National Australia Bank business confidence decreased to -4 from -1 while business conditions fell to 0 from 2 in February. Home loans grew by 3.1% month-on-month in January, from 3.6% the previous month. The Australian dollar depreciated by 3.9% against the US dollar this week. The Australian government joined other economies in announcing a stimulus package worth more than $15 billion that includes an extension of asset write-offs and measures to protect apprenticeships across the country. Reserve Bank of Australia Deputy Governor Debelle confirmed that the bank would consider quantitative easing if necessary. Report Links: On AUD And CNY - January 17, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 A Contrarian View On The Australian Dollar - May 24, 2019 New Zealand Dollar Chart II-11NZD Technicals 1 Chart II-12NZD Technicals 2 Recent data in New Zealand have been negative: Manufacturing sales grew by 2.7% quarter-on-quarter in Q4 2019. The preliminary ANZ business confidence numbers plummeted to -53.3 from -19.4 in March. Export intentions, at -21.5, hit an all-time low in March. Electronic card retail sales grew by 8.6% year-on-year in February, picking up from 4.2% in January. The New Zealand dollar depreciated by 1.9% against the US dollar this week. The government is planning a business continuity package that will be ready in coming weeks. Reserve Bank of New Zealand Governor Orr stated that the bank would consider unconventional policy such as negative rates, interest rate swaps, and large scale asset purchases only if policy rates hit the effective zero bound. Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 Place A Limit Sell On DXY At 100 - November 15, 2019 USD/CNY And Market Turbulence - August 9, 2019 Canadian Dollar Chart II-13CAD Technicals 1 Chart II-14CAD Technicals 2 Recent data in Canada have been mixed: Average hourly earnings grew by 4.3% year-on-year and 30.3 thousand new jobs were added to the Canadian economy in February. Imports fell to CAD 49.6 billion, exports fell to CAD 48.1 billion, and the deficit in international merchandise trade swelled to CAD 1.47 billion in February.  The Ivey PMI decreased to 54.1 from 57.3 on a seasonally-adjusted basis in February. The Canadian dollar depreciated by 3% against the US dollar this week. The petrocurrency sold off as oil plunged in its biggest decline since the Gulf War in 1991. Exports of motor vehicles and energy products were down, contributing to the widening deficit. Supply and demand factors are bearish for oil, which will put a floor under our long EUR/CAD trade. Report Links: The Loonie: Upside Versus The Dollar, But Downside At The Crosses Updating Our Balance Of Payments Monitor - November 29, 2019 Making Money With Petrocurrencies - November 8, 2019 Swiss Franc Chart II-15CHF Technicals 1 Chart II-16CHF Technicals 2 There were scant data out of Switzerland this week: The unemployment rate remained flat at 2.3% in February. Foreign currency reserves increased to CHF 769 billion from CHF 764 billion in February while total sight deposits ticked up to CHF 598.5 billion from CHF 503.6 billion in the week ended March 6.   The Swiss franc appreciated by 0.7% against the US dollar this week. The franc was driven by safe-haven flows at the beginning of the week but sold off as the market posted a tentative rally. Sight deposit and reserve data suggest the Swiss National Bank (SNB) intervened to keep EUR/CHF above the key 1.06 level. The ECB’s decision to hold rates will take some pressure off the SNB. Report Links: On The DXY Breakout, Euro, And Swiss Franc - February 21, 2020 Currency Market Signals From Gold, Equities And Flows - January 31, 2020 Portfolio Tweaks Before The Chinese New Year - January 24, 2020 Norwegian Krone Chart II-17NOK Technicals 1 Chart II-18NOK Technicals 2 Recent data in Norway have been negative: Headline CPI grew by 0.9% from 1.8% while the core figure grew by 2.1%, slowing from 2.9%, in February. Manufacturing output contracted by 1.4% month-on-month in January. The PPI contracted by 7.4% year-on-year in February, deepening the contraction of 3.9% the previous month. The Norwegian krone depreciated by 8.2% against the US dollar this week. As expected, the currency was hit hard by tumbling oil prices. The government is set to present emergency measures which will target bankruptcies and layoffs in sectors hit hard by Covid-19, such as airlines, hotels, and parts of the manufacturing industry. There may also be scope for the government to directly stimulate demand in the oil industry. Report Links: Building A Protector Currency Portfolio - February 7, 2020 On Oil, Growth And The Dollar - January 10, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 Swedish Krona Chart II-19SEK Technicals 1 Chart II-20SEK Technicals 2   There were scant data out of Switzerland this week: The current account surplus shrank to SEK 39 billion from SEK 65 billion in Q4 2019. The Swedish krona depreciated by 3% against the US dollar this week. The Swedish government announced a SEK 3 billion supplementary budget bill to combat the shock from Covid-19, in addition to preexisting tax credits and an extra SEK 5 billion promised to local authorities in the upcoming spring mini-budget. Riksbank Governor Ingves emphasized the need to maintain liquidity via more generous terms for loans to banks or direct purchases of securities. A rate cut, however, does not seem to be on the table. Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 Where To Next For The US Dollar? - June 7, 2019 Balance Of Payments Across The G10 - February 15, 2019 Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Limit Orders Closed Trades

Highlights The latest interest rate cuts by central banks confirms the narrative that the authorities view economic risks as asymmetrical to the downside. This all but assures that competitive devaluation will become the dominant currency landscape in the near future. If the virus proves to be just another seasonal flu, the global economy will be awash with much more stimulus, which will be fertile ground for pro-cyclical currencies. In the event that we get a much more malignant outcome, discussions around interest rate cuts will rapidly evolve into quantitative easing and debt monetization. The dollar will be the ultimate loser in both scenarios, but this path could be lined with intermediate strength. Our highest-conviction call before the dust settles is to short USD/JPY. We are also making a few portfolio adjustments in light of recent market volatility. Buy NOK/SEK and NZD/CHF and take profits soon on long SEK/NZD. Feature The DXY rally that began last December faltered below overhead psychological resistance at 100, and has since broken below key technical levels. The V-shaped reversal has been a mirror image of developments in equity markets, with the S&P 500 off 6% from its lows. The catalyst was aggressive market pricing of policy action from the Federal Reserve, to which the authorities yielded. The latest policy action confirms the narrative that most central banks continue to view deflation as a much bigger threat than inflation, since few have been able to achieve their mandate. This all but assures that competitive devaluation will become the dominant currency landscape, as each central bank prevents appreciation in their respective currency. Should the Fed continue on the path of much more aggressive stimulus, this will have powerful implications for the dollar and across both G10 and emerging market currencies.   The US 10-year Treasury yield broke below 1% around 1:40 p.m. EST on March 3rd. This was significant not because of the level but because it emblematically erased the US carry trade for a number of countries (Chart I-1). Should the Fed continue on the path of much more aggressive stimulus, this will have powerful implications for the dollar and across both G10 and emerging market currencies.  Chart I-1The Big Convergence To Buy Or Sell The DXY? If the virus proves to be only slightly more lethal than the seasonal flu, the global economy will be awash with much more stimulus, which will be fertile ground for pro-cyclical currencies. As a counter-cyclical currency, the dollar will buckle, lighting a fire under our favorites such as the Norwegian krone and the Swedish krona. The euro will be the most liquid beneficiary of this move. Chart I-2 shows that the global economy was already on a powerful V-shaped recovery path before the outbreak. More importantly, this recovery was on the back of easier financial conditions. Chart I-2V-Shaped Recovery At Risk Chart I-3A Second Wave Of Infections? Our roadmap is the peak in the momentum of new infections outside of China. During the SARS 2013 episode, the bottom in asset prices (and peak in the DXY) occurred when the momentum in new cases peaked. Currency markets are currently pricing a much worse outcome than SARS. The risk is that we are entering a second wave of infections outside Hubei, China, which will be more difficult to control than when it was relatively more contained within the epicenter (Chart I-3). As we aptly witnessed a fortnight ago, currency markets will make a binary switch to risk aversion on such an outcome. This warns against shorting the DXY index or buying the euro or pound in the near term. As we go to press, the virus has been identified on almost every continent except Antarctica. Even in countries such as the US, with modern and sophisticated health facilities, the costs to get tested are exorbitant for underinsured individuals.1 This all but assures that the number of underreported cases is likely non-trivial, which could trigger another market riot once they surface. Chart I-4DXY and USD/JPY Tend To Move Together Our highest-conviction call before the dust settles is therefore to short USD/JPY. As Chart I-1 highlights, the Bank of Japan is much closer to the end of their rope in terms of monetary policy tools. Long bond yields have already hit the zero bound, which means that real rates in Japan will continue to rise until the authorities are forced to act. One of the triggers to act will be a yen soaring out of control, which is not yet the case. Speculative evidence is that it will take a yen rally in the order of 12% to catalyze the BoJ. More importantly, the speed of the rally will matter. This was the trigger for negative interest rates in January 2016 as well as yield curve control in September of 2016. The first rally from USD/JPY 125 to around 112 and the subsequent rise towards 100 were both in the order of 12%. A similar rally from the recent peak near 112 will pin the USD/JPY at 100.   Bottom Line: The yen is the most attractive currency to play dollar downside at the moment. Remain short USD/JPY. If global growth does pick up and the dollar weakens, the USD/JPY and the DXY tend to be positively correlated most of the time, providing ample room for investors to rotate into more pro-cyclical pairs (Chart I-4). Competitive Devaluation? In the event that we get a much more malignant outcome, discussions around interest rate cuts will rapidly evolve into quantitative easing and debt monetization. The Reserve Bank of Australia has already stated that QE is on the table if rates touch 0.25%.2 Other central banks are likely to follow suit. As the chorus of central banks cutting rates and stepping into QE on COVID-19 rises, the rising specter of currency brinkmanship is likely to unnerve countries pursuing more orthodox monetary policies. The currency of choice will be gold and other precious metals, though the dollar, Swiss franc, and yen are likely to also outperform.  The velocity of money in both the US and the euro area was in a nascent upturn, but has started to roll over.  Whether or not countries adopt QE, what is clear is that balance sheet expansion at both the Fed and the European Central Bank is set to continue. Chart I-5 shows that the velocity of money in both nations was in a nascent upturn, but has started to roll over. This tends to lead inflation by a few quarters. On a relative basis, our bias is that the pace of expansion should be more pronounced in the US. This will eventually set the dollar up for a significant decline, albeit after a knee-jerk rally. Chart I-5ADownside Risks To US Inflation Chart I-5BDownside Risks To Euro Area Inflation In terms of quantitative easing, it is most appealing when a country has low growth, low inflation, and large amounts of public debt. If we are right that inflation is about to roll over in the US, then the public debt profile and political capital to expand the budget deficit places the nation as a prime candidate for QE (Chart I-6). Fiscal stimulus is a much more difficult discussion in Europe, Japan, or elsewhere for that matter, and likely to arrive late. Chart I-6US Government Debt Is Very High The backdrop for the US dollar is a 37% rise from the bottom. The New York Fed estimates that a 10 percentage point appreciation in the dollar shaves 0.5 percentage points off GDP growth over one year, and an additional 0.2 percentage points in the following year.3 With growth now hovering around 2%, a strong currency could easily nudge US growth to undershoot potential.  The Fed is one of the few G10 central banks with room to ease monetary policy. This sets the dollar up for an eventual decline. However, the path to QE will be lined by a strong dollar if the backdrop is flight to safety. This entails rolling currency depreciations among some developed and emerging markets. When looking for the next candidates for competitive devaluation, the natural choices are the countries with overvalued exchange rates that are exerting a powerful deflationary impulse into their economies. Chart I-7 shows the deviation of real effective exchange rates from their long-term mean, according to the BIS. Chart I-7Competitive Devaluation Candidates Bottom Line: The Fed is one of the few G10 central banks with room to ease monetary policy. This sets the dollar up for an eventual decline. It will first occur among the safe havens (currencies with already low interest rates), before it rotates to more procyclical currencies. Where Does US Politics Fit In? Politics should start to have a meaningful impact on the dollar once the democratic nominee is sealed. Super Tuesday revealed a powerful shift to the center, pinning former Vice President Joe Biden as the preferred candidate (Chart I-8). The dollar tends to thrive as political uncertainty rises. While not a forgone conclusion, a Sanders–Trump rivalry would have been a very polarized outcome, putting a bid under the greenback. Markets are likely to take a more conciliatory tone from a Biden victory, which will be negative for the greenback.   Chart I-8US Politics Will Be Important Our colleague Matt Gertken, chief geopolitical strategist, just published his analysis of Super Tuesday.4 While a contested convention remains unlikely, it will likely favor Trump’s reelection odds. What is common about a Biden-Sanders-Trump trio is that fiscal policy is set to expand in the US. This will ultimately be dollar bearish (Chart I-9). Chart I-9The Dollar And Budget Deficits Bottom Line: The election is still many months away and much can change between now and then. For now, Biden is the preferred democratic nominee. Portfolio Adjustments Chart I-10Sell CHF/NZD The sharp rally in the VIX index has opened up a trading opportunity on the short side. The historical pattern of previous spikes in the VIX is that unless the market starts to price in an actual recession, which is quite plausible, the probability of a short-term reversal is close to 100%. Given our base case that we are not headed for a recession over the next six to 12 months, we are opening a short CHF/NZD trade today. The cross tends to benefit from spikes in volatility, correcting sharply as the market unwinds overreactions. More importantly, the cross has already priced in an overshoot in the VIX in an order of magnitude akin to 2008. Place stops at 1.75 with a target of 1.45 (Chart I-10). We are also placing a limit buy on NOK/SEK at parity. The risk to this trade is a further down-leg in oil prices, but at parity, the cross makes for a compelling tactical trade. Momentum on the cross is currently bombed out. We will be closely watching whether Russia complies with OPEC production cuts and act accordingly. Remain long NOK within our petrocurrency basket against the euro. We are also looking to take profits on our long SEK/NZD trade, a nudge below our initial target. The market has fully priced in a rate cut by the Reserve Bank of New Zealand, suggesting the kiwi could have a knee-jerk rally, similar to the Aussie on the actual announcement. Finally, we were stopped out of our short gold/silver trade for a loss of 5.5%. We will be looking to re-establish this trade in the coming weeks. Stay tuned. Chester Ntonifor Foreign Exchange Strategist chestern@bcaresearch.com Footnotes 1 Bertha Coombs and William Feuer, “The coronavirus test will be covered by Medicaid, Medicare and private insurance, Pence says,” CNBC, dated March 4, 2020. 2 Michael Heath, “RBA Says QE Is Option at 0.25%, Doesn’t Expect to Need It,” Bloomberg News, dated November 26, 2019. 3 Mary Amiti and Tyler Bodine-Smith, “The Effect of the Strong Dollar on U.S. Growth,” Federal Reserve Bank of New York, dated July 17, 2015. 4  Please see Geopolitical Strategy Special Report, titled “US Election: A Return To Normalcy?”, dated March 4, 2020, available at gps.bcaresearch.com. Currencies U.S. Dollar Chart II-1USD Technicals 1 Chart II-2USD Technicals 2 Recent data in the US have been positive: The ISM manufacturing PMI fell slightly to 50.9, dragged down by the prices paid and new orders component, while the non-manufacturing index ticked up to 57.3. Core PCE inflation increased to 1.6% year-on-year in January. Unit labor costs came in at 0.9% quarter-on-quarter in Q4 of last year. This is a deceleration from the previous print of 2.5%. The DXY index depreciated by 1.4% this week. Following a conference call with G7 central banks, the Fed made an emergency rate cut of 50bps. Chairman Powell cited risks to the outlook from Covid-19 but acknowledged that the Fed can keep financial conditions accommodative, not fix broken supply chains or cure infections. Report Links: The Near-Term Bull Case For The Dollar - February 28, 2020 On The DXY Breakout, Euro, And Swiss Franc - February 21, 2020 Building A Protector Currency Portfolio - February 7, 2020 The Euro Chart II-3EUR Technicals 1 Chart II-4EUR Technicals 2 Recent data in the euro area have been positive: Core CPI inflation increased slightly to 1.2% year-on-year in February.  The producer price index contracted by 0.5% year-on-year in January. The unemployment rate remained flat at 7.4% in January. Retail sales grew by 1.7% year-on-year in January, remaining flat from the previous month. The euro appreciated by 3.6% against the US dollar this week. As the ECB is limited by the zero lower bound, the euro strengthened on expectations that rate differentials with the US will continue to narrow. The ECB could resort to policy alternatives such as a special facility targeting small and medium enterprises. Markets are pricing in an 81% probability of a rate cut as we go into the ECB meeting next week. Report Links: On The DXY Breakout, Euro, And Swiss Franc - February 21, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 On Money Velocity, EUR/USD And Silver - October 11, 2019 Japanese Yen Chart II-5JPY Technicals 1 Chart II-6JPY Technicals 2 Recent data in Japan have been negative: The Tokyo CPI excluding fresh food grew by 0.5% year-on-year in February from 0.7% the previous month. The jobs-to-applicants ratio decreased to 1.49 from 1.57 while the unemployment rate increased to 2.4% from 2.2% in January. The consumer confidence index declined to 38.4 from 39.1 in February. Housing starts contracted by 10.1% year-on-year in January from 7.9% the previous month. The Japanese yen appreciated by 2.5% against the US dollar this week. Lower US yields, combined with continued risk-on flows, have extended the rally in the Japanese yen. Weakness in the Japanese economy is broad based, but the BoJ has limited policy space and fiscal action looks unlikely anytime soon. Global central bank action will drive the yen in the near term. Report Links: The Near-Term Bull Case For The Dollar - February 28, 2020 Building A Protector Currency Portfolio - February 7, 2020 Currency Market Signals From Gold, Equities And Flows - January 31, 2020 British Pound Chart II-7GBP Technicals 1 Chart II-8GBP Technicals 2 Recent data in the UK have been mixed: Consumer credit decreased to GBP 1.2 billion from GBP 1.4 billion while net lending to individuals fell to GBP 5.2 billion from GBP 5.8 billion in January. Mortgage approvals increased to 70.9 thousand from 67.9 thousand in January, while the Nationwide housing price index grew by 2.3% year-on-year in February from 1.9% the previous month.  The British pound appreciated by 0.2% against the US dollar this week. At a hearing this week, incoming governor Andrew Bailey stated that the BoE is still assessing evidence on the nature of the shock from Covid-19. The BoE has limited room to cut and is constrained by possible stagflation; we expect targeted supply chain finance and cooperation with fiscal authorities to take precedence.   Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 A Few Trade Ideas - Sept. 27, 2019 United Kingdom: Cyclical Slowdown Or Structural Malaise? - Sept. 20, 2019 Australian Dollar Chart II-9AUD Technicals 1 Chart II-10AUD Technicals 2 Recent data in Australia have been mixed: GDP grew by 2.2% year-on-year in Q4 2019, improving from 1.7% the previous quarter.  Imports and exports both contracted by 3% while the trade balance dropped to AUD 5.2 billion in January. Building permits contracted by a dramatic 15.3% month-on-month in January, compared to growth of 3.9% in December. The RBA commodity price index contracted by 6.1% year-on-year in February.  The Australian dollar appreciated by 0.8% against the US dollar this week. The Reserve Bank of Australia cut its official cash rate to 0.5%, an all-time low, citing the impact of Covid-19 on domestic spending, education, and travel. Watch to see if the signal from building permits is confirmed by other housing market indicators. The RBA might not be done easing. Report Links: On AUD And CNY - January 17, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 A Contrarian View On The Australian Dollar - May 24, 2019 New Zealand Dollar Chart II-11NZD Technicals 1 Chart II-12NZD Technicals 2 Recent data in New Zealand have been negative: The terms of trade index grew by 2.6% quarter-on-quarter in Q4 2019, improving from 1.9% in Q3. The ANZ commodity price index contracted by 2.1% in February, deepening from 0.9% the previous month. Building permits contracted by 2% month-on-month in January, from growth of 9.8% in December.  The global dairy trade price index contracted by 1.2% in March.  The New Zealand dollar appreciated by 0.3% against the US dollar this week. There is pressure on the Reserve Bank of New Zealand (RBNZ) to ease at its next meeting on March 27, with markets pricing in 42 basis points of easing over the next 12 months. However, the RBNZ has dispelled notions of a pre-meeting cut. Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 Place A Limit Sell On DXY At 100 - November 15, 2019 USD/CNY And Market Turbulence - August 9, 2019 Canadian Dollar Chart II-13CAD Technicals 1 Chart II-14CAD Technicals 2 Recent data in Canada have been negative: Annualized GDP grew by 0.3% quarter-on-quarter in Q4 2019, slowing from 1.4% the previous quarter.  The raw material price index contracted by 2.2% and industrial product price index contracted by 0.3% month-on-month in January.  Labor productivity contracted by 0.1% quarter-on-quarter in Q4 2019, compared to growth of 0.2% the previous quarter. The Canadian dollar depreciated by 0.1% against the US dollar this week. The Bank of Canada (BoC) followed the Fed and cut rates by 50bps. In addition to the confidence hit from Covid-19, the BoC cited falling terms of trade, depressed business investment, and dampened economic activity due to the CN rail strikes. The BoC stands ready to ease further, and Prime Minister Trudeau has raised the possibility of a fiscal response.   Report Links: The Loonie: Upside Versus The Dollar, But Downside At The Crosses Updating Our Balance Of Payments Monitor - November 29, 2019 Making Money With Petrocurrencies - November 8, 2019 Swiss Franc Chart II-15CHF Technicals 1 Chart II-16CHF Technicals 2 Recent data in Switzerland have been positive: GDP grew by 1.5% year-on-year in Q4 2019, from growth of 1.1% the previous quarter. The SVME PMI increased to 49.5 from 47.8 in February. The KOF leading indicator increased to 100.9 from 100.1 in February. CPI contracted by 0.1% year-on-year in February, from growth of 0.2% the previous month. The Swiss franc appreciated by 1.6% against the US dollar this week. A combination of strong domestic data and global risk-off flows contributed to strength in the Swiss franc. However, the Swiss government will be revising down growth forecasts and a recent UN report has estimated that Switzerland lost US$ 1 billion in exports in February due to Chinese supply disruptions. Combined with a strong franc, this puts the domestic outlook at risk.  Report Links: On The DXY Breakout, Euro, And Swiss Franc - February 21, 2020 Currency Market Signals From Gold, Equities And Flows - January 31, 2020 Portfolio Tweaks Before The Chinese New Year - January 24, 2020 Norwegian Krone Chart II-17NOK Technicals 1 Chart II-18NOK Technicals 2 Recent data in Norway have been positive: The current account decreased to NOK 19.1 billion from NOK 29.5 billion in Q4 2019. The credit indicator grew by 5% year-on-year in January. Registered unemployment decreased slightly to 2.3% from 2.4% in February.  The Norwegian krone appreciated by 1.3% against the US dollar this week. Expect the petrocurrency to trade on news from the OPEC meetings in the coming days. The committee has proposed a production cut of 1.5 million barrels per day through Q2 2020, conditional on approval from Russia, to offset the demand shock from Covid-19.  Report Links: Building A Protector Currency Portfolio - February 7, 2020 On Oil, Growth And The Dollar - January 10, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 Swedish Krona Chart II-19SEK Technicals 1 Chart II-20SEK Technicals 2 Recent data in Sweden have been positive: The Swedbank manufacturing PMI increased to 53.2 from 52 in February. Industrial production grew by 0.9% year-on-year, from a contraction of 2.6% the previous month. GDP grew by 0.8% year-on-year in Q4 2019, slowing from 1.8% the previous month. The Swedish krona appreciated by 1.5% against the US dollar this week. After hitting a 2-decade high near 10, USD/SEK has violently reversed and is now trading at the 9.45 level. What is evident from incoming data is that the cheap currency has been a perfect shock absorber, cushioning the domestic economy. We are protecting profits on long SEK/NZD today and we will be looking for other venues to trade SEK on the long side.   Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 Where To Next For The US Dollar? - June 7, 2019 Balance Of Payments Across The G10 - February 15, 2019 Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Limit Orders Closed Trades

Highlights A currency portfolio comprised of the US dollar, the Japanese yen and the Norwegian krone is likely to outperform a more diversified basket over multiple macroeconomic scenarios. Our work suggests that valuation matters for currencies over the long term. The cheapest currencies in our universe are the Norwegian krone, the Swedish krona and the Japanese yen, although the pound and euro are also attractive. Tactical investors should remain short the DXY index, but also have a higher concentration of dollar-neutral trades given the uncertainty surrounding global growth. Feature A currency investor can construct a long-term portfolio based on three criteria. The first task is to figure out what macroeconomic environment she or he is residing in. During inflationary periods, “hard” currencies tend to do best, since they are usually associated with countries where the private sector is running surpluses. The lack of excess demand in these countries leads to lower inflation, which tends to boost real rates. Examples in recent history include the deutschemark during the 1970s or the Japanese yen throughout most of the ‘80s. In a disinflationary world, the high-yielders tend to be the outperformers. This is not only because the lack of an inflationary pulse leads to very positive real rates, but these are also the countries that tend to be at the forefront of the disinflationary boom, leading to rising demand for their currencies. For example, the 2000s saw emerging market and commodity currencies as the outperformers on the back of a resources boom, while the ‘90s saw the dollar rise on the back of a US productivity boom. Over the long term, a currency portfolio should include a combination of both “hard” and carry currencies. Over the long term, a currency portfolio should include a combination of both “hard” and carry currencies, with the weights adjusted based on investor preferences. For example, the risk to the world economy today remains deflation. Looking at core inflation across countries, most prints are below the magical 2% target level (Chart I-1).  Inflation aside, the biggest catalyst for an investor to favor the disinflationary camp is the sequence of events we have experienced over the last two years – a trade war, Chinese deleveraging, a protracted economic expansion, bear markets in everything from sugar futures to energy stocks, and a virus outbreak. With the US 10-year versus 3-month yield curve having inverted anew, the obvious corollary is that a recession in the next few years (even of the stagflationary variety), will benefit the “hard” currencies. If we assume that the US 10-year CPI swap is a good reflection of investors’ perceptions of an inflationary versus deflationary world, then there are two crucial observations today. The first is that the British pound is the currency most attune to inflation today, while the Japanese yen thrives in deflation (Chart I-2). The second is that both the US dollar and the euro have been very indifferent to inflationary or deflationary risks over the past three years (Chart I-2, bottom panel). Using a very simple rule, an equally weighted basket of the British pound, US dollar1 and Japanese yen will make sense in this macroeconomic framework Chart I-1A Big F For Central ##br##Banks Chart I-2Inflation And Deflation Protection Are Important The Value Factor Our work suggests that valuation matters for currencies over the long term, a point we will discuss in an upcoming report. Therefore, the next challenge in building a protective portfolio is choosing currencies with the potential for long-term appreciation. While we look at a wide swathe of currency valuation models, we tend to adhere to the very simple and time-tested purchasing power parity (PPP) model. Our in-house PPP models have made two crucial adjustments. In order to get closer to an apples-to-apples comparison across countries, we divide the consumer price index (CPI) baskets into five major groups. In most cases, this breakdown captures 90% of the national CPI basket: food, restaurants and hotels (1), shelter (2), health care (3), culture and recreation (4), and energy and transportation (5). The second adjustment is to run two regressions with the exchange rate as the dependent variable. The first regression (call it REG1) uses the relative price ratios of the five subgroups grouped as independent variables. This allows us to observe the most influential price ratios that help explain variations in the exchange rate. The second regression (call it REG2) uses a weighted-average combination of the five groups to form a synthetic relative price ratio. If, for example, shelter is 33% in the US CPI basket, but 19% in the Swedish CPI basket, relative shelter prices will represent 26% of the combined price ratio. This allows for a uniform cross-sectional comparison, compared to using the national CPI weights. Our in-house PPP models have made two crucial adjustments. The results show that the cheapest currencies today are the Swedish krona, the Norwegian krone and the Japanese yen (Chart I-3). This is good news. The Japanese yen was already favored in our simple macroeconomic framework, and so it remains in the portfolio. However, given that the Swedish krona, the Norwegian krone, and the British pound tend to be highly correlated, it may be useful to reduce the list. Of all three, the Norwegian krone has the same macroeconomic attributes as the pound (most correlated to rising nominal rates), but comes at a cheaper price (Chart I-4). And so, it replaces the British pound in the portfolio. Chart I-3Lots Of Value In NOK, SEK And JPY Chart I-4NOK And USD Remain Carry Currencies The Sentiment Factor Sentiment is difficult to measure in currency markets, since it is hard to find an exhaustive list that encompasses investor biases. Speculative positioning tends to be our favorite contrarian indicator, but has limitations as a timing tool. Meanwhile, certain currencies tend to be momentum plays, while others are mean-reversion plays. In general, when both positioning and momentum are at an extreme and rolling over, this is generally a potent signal for a currency cross. Being long Treasurys and the dollar has been a consensus trade for many years now. According to CFTC data, this has been expressed mostly through the aussie and the yen, although our bias is that the Swedish krona and Norwegian krone have been the real victims (Chart I-5). That said, long positioning in the dollar has been greatly reduced over the past several weeks. Flow data supports this view. Net foreign purchases of US Treasurys by private investors are still positive, but the momentum of these flows is clearly rolling over. This is being more than offset by official net outflows. As interest rate differentials have started moving against the US, so has foreign investor appetite for Treasury bonds. Being long Treasurys and the dollar has been a consensus trade for many years now. The US dollar is a momentum currency, and the crossover between the 50-day and 200-day moving average has been good at signaling shifts in its intermediate trend (Chart I-6). Despite the recent uptick in the DXY, this still suggests downside in the coming months. Chart I-5Lots Of USD Longs Chart I-6Watch The DXY Technical Pattern So What? Chart I-7Who Will Be The Leaders In 2022? Regular readers of our bulletin are well aware that we are dollar bears. However, in constructing a currency portfolio that will stand resilient in the face of multiple macroeconomic shocks, our recommendation is an equal-weighted basket of the US dollar, the Japanese yen and the Norwegian krone. How has this protector portfolio performed over time? Not so well. Since the financial crisis, the basket has underperformed the DXY index, but has been relatively flat over the last half decade, while generating a positive carry (Chart I-7). In the aftermath of the Great Financial Crisis, positive returns on the Norwegian krone and Japanese yen offset dollar weakness, an environment that could be replayed once global growth bottoms. Obviously, this requires further research. Portfolio Calibration Our portfolio strategy for the last half year or so has focused on dollar-neutral trades, given the uncertainty that has been grappling currency markets. Most of these trades are agnostic to the three fundamental factors outlined above. Stick with them. Long AUD/NZD: This is a play on rising terms of trade between Australia and New Zealand, as well as a much more advanced housing downturn in Australia. Over the past five years, the cross has fluctuated between 1.02 and 1.12, currently sitting at the lower bound of this range. Increased agricultural exports from the US to China will hurt New Zealand at the margin, but long-term Aussie LNG imports and coal exports to China should remain relatively resilient. Long AUD/CAD: It is becoming clearer that the People’s Bank of China has a stronger incentive to stimulate its economy relative to the Fed. This will benefit the Chinese and Australian economies at the margin, and by extension the AUD/CAD cross (Chart I-8).  Short CAD/NOK: A play on diverging oil fundamentals between North Sea crude and Canadian heavy oil. A swift rebound in the European economy relative to the US will also benefit this cross.  Short USD/JPY: A top recommendation for the protector portfolio. It is noteworthy that this cross has a strong positive correlation to rising gold prices (and falling real rates).  Long SEK/NZD: A mean reversion trade, primarily based on valuation and relative fundamentals. The latest PMI print suggests a meaningful improvement in the Swedish economy in the months ahead (Chart I-9).   Chart I-8Stay Long AUD/CAD Buy ##br##AUD/CAD Chart I-9Bet On A Swedish (And European) Recovery A Tentative Bottom In Euro Area Data Short USD/NOK: A top recommendation for the protector portfolio as well as a play on rising oil prices.  Ditto for the petrocurrency basket. Long EUR/CAD: A swift rebound in the European economy relative to the US will benefit this cross, similar to short CAD/NOK positions.  Short CHF/JPY: Low-cost portfolio insurance negatively correlated to rising yields, and a strong positive correlation to rising gold prices (Chart I-10). Chart I-10The Yen Is Better Insurance   Chester Ntonifor Foreign Exchange Strategist chestern@bcaresearch.com Footnotes 1  We use the USD/EUR exchange rate since the carry is positive. Returns are unhedged.  Currencies U.S. Dollar Chart II-1USD Technicals 1 Chart II-2USD Technicals 2 Recent data in the US have been positive: The ISM manufacturing PMI soared to 50.9 while the Markit manufacturing PMI increased slightly to 51.9. The ISM non-manufacturing PMI increased to 55.5 and the Markit services PMI edged up to 53.4 in January. Nonfarm productivity grew by 1.4% quarter-on-quarter on an annualized basis in Q4 2019. Initial jobless claims fell to 202K from 217K for the week ended January 31st. The Johnson Redbook index of same-store sales grew by 5.7% year-on-year in January. The DXY index appreciated by 0.4% this week. In addition to coronavirus fears, a strong showing in domestic data has helped push up the USD. With the number of new coronavirus cases flattening outside of the Hubei province, it appears the rally in the DXY could end as early as mid to late-February. Report Links: Currency Market Signals From Gold, Equities And Flows - January 31, 2020 Portfolio Tweaks Before The Chinese New Year - January 24, 2020 On Oil, Growth And The Dollar - January 10, 2020 The Euro Chart II-3EUR Technicals 1 Chart II-4EUR Technicals 2 Recent data in the euro area have been mixed: GDP growth fell to 0.1% year-on-year from 0.3% in Q4 2019. The Markit manufacturing PMI moved up slightly to 47.9 while the services PMI increased to 52.5 in January. Retail sales growth slowed to 1.3% year-on-year from 2.3% in December. Core CPI inflation decreased slightly to 1.1% in January. The euro depreciated by 0.3% against the US dollar this week. While retail sales disappointed, the manufacturing and services PMI numbers beat expectations, confirming our expectations for a global growth rebound. With a European green deal on the horizon, and interest rates near the lower bound of negative territory, the euro is poised for recovery. Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 On Money Velocity, EUR/USD And Silver - October 11, 2019 A Few Trade Ideas - Sept. 27, 2019 The Yen Chart II-5JPY Technicals 1 Chart II-6JPY Technicals 2 Recent data in Japan have been mixed: The Markit manufacturing PMI declined to 48.8 from 49.3 in January while the services PMI increased to 51 from 49.4. Passenger vehicle sales continued to contract, going down 11.5% year-on-year in January. Construction orders rebounded strongly by 21.4% year-on-year in December, moving out of contractionary territory. The contraction in housing starts slowed to 7.9% year-on-year in December. The Japanese yen depreciated by 0.8% against the US dollar this week. The contraction in passenger vehicle sales can be largely attributed to extensive damage from typhoon Hagibis and typhoon Faxai. However, the Japanese economy will be buoyed by strong construction growth ahead of the summer Olympics, putting a floor under our short USD/JPY hedge. Report Links: Currency Market Signals From Gold, Equities And Flows - January 31, 2020 Portfolio Tweaks Before The Chinese New Year - January 24, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 British Pound Chart II-7GBP Technicals 1 Chart II-8GBP Technicals 2 Recent data in the UK have been positive: The Markit manufacturing PMI increased to 50 from 49.8 in January while the services PMI increased to 53.9 from 52.9. The GfK Group consumer confidence index ticked up to -9 from -11 in January. Consumer credit increased to GBP 1.22 billion in December from 0.66 billion in November. The British pound depreciated by 0.9% against the US dollar this week. In a speech delivered an hour before the UK left the European Union, PM Boris Johnson appeared defiant, rejecting EU rules on British industry and demanding a free trade agreement. Despite a decent uptick in the PMI numbers, the pound is weighed down by uncertainty about coming negotiations with the European Union. For option traders, pound volatility is set to rise. Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 A Few Trade Ideas - Sept. 27, 2019 United Kingdom: Cyclical Slowdown Or Structural Malaise? - Sept. 20, 2019 Australian Dollar Chart II-9AUD Technicals 1 Chart II-10AUD Technicals 2 Recent data in Australia have been positive: The Markit manufacturing PMI increased to 49.6 from 49.1 while the services PMI increased to 50.6 from 48.9 in January. Building permits grew by 2.7% year-on-year in December, moving out of contractionary territory. Exports grew by 1% month-on-month in December, slowing slightly from a growth rate of 1.3% the previous month. The Australian dollar appreciated by 0.5% against the US dollar this week. Despite concerns about coronavirus, and the bushfires, the Reserve Bank of Australia (RBA) decided to hold rates at 0.75%. The recovery in house prices now making its mark on building permits data, and the manufacturing PMI edging towards expansionary territory giving the RBA’s wiggle room in being patient. We are long AUD/NZD, AUD/CAD and AUD/USD. This makes a rebound in AUD one of our most potent bets. Stick with it. Report Links: On AUD And CNY - January 17, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 A Contrarian View On The Australian Dollar - May 24, 2019 New Zealand Dollar Chart II-11NZD Technicals 1 Chart II-12NZD Technicals 2 Recent data in New Zealand have been positive: Building permits soared by 9.9% month-on-month in December, from an 8.4% contraction the prior month.  The labor force participation rate moved down slightly to 70.1% in Q4 2019. The labor cost index grew by 2.4% year-on-year in Q4 2019, compared to growth of 2.3% in the previous quarter.  The unemployment rate fell slightly to 4% in Q4 2019. The New Zealand dollar depreciated by 0.2% against the US dollar this week. With the data remaining positive and cases of the coronavirus outside the Hubei province set to peak in the coming weeks, the downward pressure on the New Zealand Dollar should ease. Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 Place A Limit Sell On DXY At 100 - November 15, 2019 USD/CNY And Market Turbulence - August 9, 2019 Canadian Dollar Chart II-13CAD Technicals 1 Chart II-14CAD Technicals 2 Recent data in Canada have been solid: The Markit manufacturing PMI increased to 50.6 from 50.4 in January. Canadian GDP growth remained fairly flat at 0.1% month-on-month in November. Imports increased slightly to C$ 49.69 billion in December 2019 while exports moved up to C$ 48.38 billion. The raw material price index grew by 2.8% in December, picking up pace from November’s reading of 1.4%. The Canadian dollar depreciated by 0.5% against the US dollar this week. The growth in Canadian exports was led by crude oil exports, which posted a monthly gain of 18% following the resolution of a rupture in the Keystone pipeline in North Dakota. However, a widening trade deficit with countries other than the US will put downward pressure on the Canadian dollar at the crosses. Report Links: The Loonie: Upside Versus The Dollar, But Downside At The Crosses Updating Our Balance Of Payments Monitor - November 29, 2019 Making Money With Petrocurrencies - November 8, 2019 Swiss Franc Chart II-15CHF Technicals 1 Chart II-16CHF Technicals 2 Recent data in Switzerland have been mixed: The SVME manufacturing PMI decreased to 47.8 from 48.8 in January. Real retail sales grew by 0.1% year-on-year in December, slowing from 0.5% in November. The SECO consumer climate indicator for Q1 2020 printed slightly better at -9.4 from -10.3 in Q4 2019. The Swiss franc depreciated by 0.5% against the US dollar this week. Domestically, consumer sentiment was buoyed by the general outlook on economic growth. However, the outlook for households’ own budget remains gloomy. The decrease in global volatility will undermine the Swiss franc and with an uncertain domestic outlook, stealth intervention might be on the horizon. Report Links: Currency Market Signals From Gold, Equities And Flows - January 31, 2020 Portfolio Tweaks Before The Chinese New Year - January 24, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 Norwegian Krone Chart II-17NOK Technicals 1 Chart II-18NOK Technicals 2 Recent data in Norway have been mixed: The credit indicator, which measures growth in private sector debt, grew by 5.1% year-on-year in December, slowing from 5.6% the previous month. Registered unemployment (NSA) increased to 2.4% from 2.2% the previous month. The Norwegian Krone depreciated by 0.3% against the US dollar this week. However, the dramatic plunge in the NOK over the last few weeks, which has mirrored a similar drop in the WTI oil price, has taken contrarian investors by surprise. Our Commodity & Energy Strategists currently expect OPEC to respond with additional cuts of 500k barrels per day. In addition, if coronavirus cases peak sooner than expected, this will quicken the recovery in Asian economies, bolstering oil demand and driving up prices. Remain short USD/NOK. Report Links: On Oil, Growth And The Dollar - January 10, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 Making Money With Petrocurrencies - November 8, 2019 Swedish Krona Chart II-19SEK Technicals 1 Chart II-20SEK Technicals 2 Recent data in Sweden have been mostly positive: The Swedbank manufacturing PMI soared to 51.5 from 47.7 in January. Industrial production contracted by 3.2% year-on-year in December, compared to growth of 0.1% the previous month. Manufacturing new orders contracted by 4.7% year-on-year in December, deepening the contraction of 1.8% in November. The Swedish Krona remained flat against the US dollar this week. As we noted last week, the Swedbank PMI has risen in lockstep with the business confidence number. It is now in expansionary territory for the first time since August of last year. Within the Swedbank survey, the sub-indices for new orders and production posted the largest gains. While the hard data on production and new orders for the month of December was disappointing, we expect it to follow the soft data upwards in the coming months as global growth concerns fade. Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 Where To Next For The US Dollar? - June 7, 2019 Balance Of Payments Across The G10 - February 15, 2019 Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Limit Orders Closed Trades

ハイライト ほとんどの中央銀行は依然として経済リスクを下方リスクに偏ったものと見なしている。 これは、世界的な成長が本格的に回復したとしても、今後3〜6か月は政策が据え置かれる可能性が高いことを意味する。 結論としては、今後数か月の為替の値動きは中央銀行の政策というよりも相対的な成長ファンダメンタルズが主導する可能性が高い。 我々のバイアスは、今年前半は米国以外で成長の勢いが最も強くなるというものだ。DXY指数はショートで構える。 今週の日銀の不作為は、為替ボラティリティの上昇に対する円ロングを安価な保険にしている。USD/JPYはショートを維持し、CHF/JPYはショートを取る。 ポンドは押し目買いだが、今後数か月はユーロに対してやや劣後する公算が大きい。EUR/GBPは0.88に達するはずだ。 カナダ銀行は利率を据え置いたが、我々の期待通りタカ派寄りではなくハト派寄りの判断を示した。CAD/NOKはショート、AUD/CADはロングを維持する。 我々のロングNOK/SEKポジションは1.8%の利益でストップにかかって決済された。より低い水準でこのクロスを買い戻すことを検討する。 特集 チャート I-1 為替市場は穏やかな回復を織り込んでいる 為替市場は穏やかな回復を織り込んでいる 為替市場は穏やかな回復を織り込んでいる 8月の安値以降の世界株式市場の強い反発は、多くの株価指数を買われ過ぎ領域に押し上げた。チャート I-1 は、世界株の上昇が既にグローバル製造業の改善を2012年や2016年の局面と同程度の規模で織り込んでいることを示している。一方で為替市場ははるかに穏やかな結果を織り込んでいる（下段）。 為替と株式のパフォーマンスの乖離は、過去のサイクルで見られたものとは大きく異なる。例えば、ボトムからピークにかけて、為替市場における強欲と恐怖の重要なバロメーターであるAUD/JPYは2012年の局面で40％、2016〜2017年で25％上昇し、株価も上昇した。RUB/JPY、ZAR/JPY、BRL/JPYのようなよりハイオクタンな通貨ペアのパフォーマンスは爆発的だった。今回のように通貨の動きが抑制されていることは、この回復の持続性に疑問符を付ける。 株式は長期資産であるため、2019年の金利低下が相対的な魅力を高め名目価値を押し上げたというのはもっともらしい説明だ。しかし、多くの債券市場でもここ数か月で利回りが上昇しており、この説明だけでは不十分とも言える。別の可能性としては、貿易緊張の緩和やFRBの流動性注入が国内投資家の動物的精神を呼び起こしたのかもしれない。あるいは、世界的な同期化した回復がG10の成長差を縮め、通貨の動きを抑えつつ株価を押し上げたのかもしれない。 世界株の上昇は既にグローバル製造業の改善を織り込んでいる。しかし、為替市場ははるかに穏やかな結末を織り込んでいる。 いずれにせよ、この不協和音の解決は、今後数か月で世界の経済データが著しく改善してプロシクリカル通貨を支持するか、株式市場の消化不良期（ボラティリティ上昇）を迎えるか、あるいはその両方の組み合わせによってもたらされるだろう。少なくとも、これらのダイナミクスを見越して通貨ポートフォリオを調整することを示唆している。 ボラティリティとドルについて 為替市場は相対的なトレンドに関するものだということは誰もが理解している。したがって、世界成長が加速すればドルが弱くなるという暗黙の前提は、この回復の震源地が米国外にあるということを意味する。チャート I-2 は、米国外で経済指標がまだ上振れを示しているわけではないことを示しているが、変化率ベースでは著しい改善が見られる。表面下では、最も強いデータサプライズはユーロ圏、スイス、ニュージーランド、オーストラリアで見られ、カナダと英国は予想外の失望があった。振り返れば、このチャートはカナダドルが2019年にG10で最も好調だった理由、スウェーデンクローナが最も弱かった理由も浮き彫りにしている。 チャート I-2 成長のばらつきは縮小した グロースの分散が減少した グロースの分散が減少した 経済の分散の低下は通貨ボラティリティをほぼ史上最低水準に押し下げている（チャート I-3）。経験豊富な投資家は低ボラティリティに注目し、注目すべきだ。なぜなら、ポートフォリオを破壊するのは熱狂ではなく慢心だからである。これは自明の理に聞こえるかもしれないが、過去3回ボラティリティがこれほど低下した局面ではドルは急騰し、プロシクリカル通貨は大きな損失を被った。誰もが1997〜1998年、2007〜2008年、2014〜2015年を覚えている。今回は同じだろうか？ 通常、ボラティリティの上昇はドル高と結びつくが、今回は3つの重要な相違点がある。 第一に、実質金利は2014年に米国がG10の同業国に対してプラスに転じた（チャート I-4）。これは、通常は資金調達通貨であった米ドル（準備通貨でもある）がキャリートレードの対象になったことを意味する。米国債に資金を振り向けたい資本は5年以上にわたり正の実質キャリーを享受してきたと言ってよい。現在米国の実質相対利回りが頭打ちになっている中で、資本はどちらに向かうだろうか？ チャート I-3 ボラティリティは史上最低水準付近 ボラティリティが記録的低水準に近い ボラティリティが記録的低水準に近い チャート I-4 米国の実質金利は低下 米国で実質金利が低下 米国で実質金利が低下 ドルは2011年以降ブル相場にあり、評価は高い四分位にシフトしている。これは、ドルが前の低ボラティリティ局面でより早い段階でブル相場にあった時とは大きく異なる（チャート I-5）。ドルは長いサイクルで動く傾向があり、ボラティリティの急騰はサイクルの始まりか終わりのいずれかを示すことがある。 以前のレポートで繰り返し強調してきたように、米ドルロングはコンセンサストレードである。我々の主な根拠はCFTCのポジショニングデータだ。しかし、よりタイムリーな先行指標として注視すべきは金と債券の比率だ。通貨は信認に関するものであり、米ドルへの信認の重要な尺度は米10年国債の総リターンと金地金の比率であり、これは崩れている（チャート I-6）。米国の財政赤字はこれから急拡大する見込みであり、過去のドル高の局面では赤字は低く減少傾向にあった。 チャート I-5 ドルは割高である ドルは高い ドルは高い チャート I-6 米国債と金の綱引き 米国債と金の綱引き 米国債と金の綱引き より重要なのは、通貨市場は相対的なファンダメンタルズに合わせて変動する可能性が高いということだ。世界経済の減速は製造業が主因であったため、平均回帰が期待できるのはこの分野だと考えるのが妥当だ。歴史的に見て、多くの経済における景気循環の振幅はサービス（消費）よりも製造業や輸出に牽引される傾向がある。 より具体的には、製造業の減速で最も痛手を被った通貨が最も早いリバーサルを経験する論理的な候補となる。これは既に、対米国での債券利回りの急上昇として現れているvis-à-vis 米国の利回りに対してである。例えば、ノルウェー、スウェーデン、スイス、日本の利回りはボトム以降、対米で大幅に上昇している。世界的な成長の同期回復は米国の利回り優位をさらに削ぐだろう。 通貨は信認に関するものであり、米ドルへの信認の重要な尺度は米10年国債の総リターンと金地金の比較である。 結論： DXY指数はショートを維持、当面のターゲットを90、ストップロスを100に設定する。 ポートフォリオ保険としての円 もし我々の2020年のドルに対する下落トレンドという仮説が正しければ、それは一直線には進まないだろう。したがって、ポートフォリオ保険を持つことが理にかなっている。 今週の日銀の不作為は気を逸らすためのものだった可能性がある。なぜなら近月の資産市場で最も強力な動きの一つは日本の利回りに有利な+130ベーシスポイントの動きだったからだ（チャート I-7）。USD/JPYと実質金利のギャップは希少な裁定機会を生んでいる。世界的なリスク資産の売りが顕在化すれば円は強くなるだろう。一方で、世界成長が最終的に加速すれば円は通貨クロスで弱含む可能性があるが、対ドルでは強まる可能性がある。これによりUSD/JPYのショートは「勝てば大きく勝つ、負けてもそれほど失わない」という好ましい構図になる。 日本の利回り上昇は、次の3つの重要な転換点で駆動されている： 過去5年間の大半で、日銀は資産買入れの点で最も積極的な中央銀行の一つだった。これは貿易加重の円安の大きな要因だった（チャート I-8）。FRBのバランスシートの再拡大により、日本との相対的な金融政策は引き締まりつつある。日銀の年間総資産買入れは現在約20兆円、JGB買入れは約15兆円の水準で推移している。これは目標の80兆円という緩やかな目標からはほど遠く、当面変わる見込みはない。 チャート I-7 日本の国債利回りは急騰した 日本の債券利回りが急騰している 日本の債券利回りが急騰している チャート I-8 円と量的緩和（QE） 円と量的緩和 円と量的緩和 円の動きは日本の巨大小売輸出セクターを考慮すると、国内要因と同様に外部環境の影響も大きい。景気循環的なセクターのクレジット・デフォルト・スワップスプレッドは新たな安値へと収縮しており、収益見通しの改善を示唆している（チャート I-9）。これは成長要因が日本の利回りを押し上げていることを示唆する（日本のCPIスワップは実際には横ばい）。これはアジアの景気循環セクターが防御的セクターに対して最近アウトパフォームしている動きとも一致する。 安倍政権は昨年、大規模な財政パッケージを発表した。これは壊滅的だった台風被害と来たる五輪に部分的に起因する。これにより日銀は最新の政策分科会で成長見通しを上方修正した。建設・エンジニアリング株の相対パフォーマンスは、資金が経済に流入しているかどうかの重要なバロメーターである（チャート I-10）。 チャート I-9 日本のデフォルトリスク緩和 日本でデフォルト・リスクが緩和 日本でデフォルト・リスクが緩和 チャート I-10 財政刺激と建設株 財政刺激策と建設株 財政刺激策と建設株 防御通貨としての円は、グローバル成長が改善すると資金調達通貨として使われるため通常は弱含む傾向がある。とはいえ我々の主張は、円はクロスでは確かに弱まるだろうが、対ドルではなお強くなり得るということだ。前述したように、その触媒の一つは実質金利との従来の関係からの乖離である。 より重要なのは、USD/JPYとDXYは正の相関を持つ傾向があることで、なぜならドルが多くの場合円を動かすからだ。一方で、円に対するネットショートポジションは逆張りの観点から魅力的に見える（チャート I-11）。極めて低いボラティリティを考えると、USD/JPYのショートはボラティリティ上昇をプレイする魅力的な手段となる。 チャート I-11 投資家は円をショートしている 投資家は円をショートしている 投資家は円をショートしている より保守的な投資家はCHF/JPYをショートすることもできる。最近のスイスフラン高はインフレ回復の芽を脅かしており（チャート I-12）、一方で円安は国内でのトレード可能財の価格を押し上げるだろう。これにより日銀よりもスイス国立銀行に対するプレッシャーが強まる。また、セーフヘイブンとして円はフランよりも割安である。これは当社の多数の社内モデルでも確認されている。 簡単に言えば、過去数十年で米国に対する相対的インフレは日本の方が低かったが、フランの方が強かった。 簡単に言えば、過去数十年で米国に対する相対的インフレは日本の方が低かったが、フランの方が強かった（チャート I-13）。一方で、過去2年間ではボラティリティ上昇はフランよりも円に有利に働いている。 チャート I-12 強いフランはスイスのインフレにとって逆風である 強いスイスフランはスイスのインフレにとって逆風だ 強いスイスフランはスイスのインフレにとって逆風だ チャート I-13 円はより割安 ##br##保険 円はより安い保険 円はより安い保険 結論： 現時点では円が最も魅力的なセーフヘイブン通貨である。USD/JPYはショートを維持し、CHF/JPYを売る。 ハウスキーピング 我々のロングNOK/SEKポジションは1.8%の利益でストップにかかって決済された。より低い水準でこのクロスを買い戻すつもりだ。このトレードは主にキャリーに関するものであり、我々はNOKとSEKの両方に対してポジティブである。したがってマーケットタイミングが重要になる。NOK/SEKが1.04なら魅力的だ。今週の各中央銀行会合の文脈ではノルゲス銀行からの新たな示唆はなかった。 我々はポンドを押し目買いで仕込む機会も探るが、EURまたはGBPのボラティリティを買う方が良い賭けかもしれない。今のところ、堅調な雇用報告にもかかわらず英国の経済サプライズは依然としてマイナスである（チャート I-14）。続報を注目してほしい。 チャート I-14 GBPは脆弱である 英ポンドは弱含み 英ポンドは弱含み Chester Ntonifor 外国為替ストラテジスト chestern@bcaresearch.com 通貨 米ドル チャート II-1 USD テクニカル 1 米ドルのテクニカル（1） 米ドルのテクニカル（1） チャート II-2 USD テクニカル 2 米ドルのテクニカル分析 2 米ドルのテクニカル分析 2 最近の米国のデータは混在している： 鉱工業生産は12月に前年同月比で1%減少した。 ミシガン大学消費者信頼感の速報値は1月に99.1へやや低下した。 MBA住宅ローン申請件数は1月17日までの週で1.2%減少した。しかし既存住宅販売は12月に月次で3.6%増加し予想を上回った。 シカゴ地区連銀の全国活動指数は12月に0.41から-0.35へ低下した。 新規失業保険申請件数は1月17日までの週で211Kに増加し、予想より良かった。 DXY指数は今週0.4%上昇した。中国のコロナウイルスが世界成長を大幅に押し下げるのではないかという懸念が高まっている。これは短期的にはつまずきに過ぎないが、我々は依然としてポジティブで、金融条件の緩和と貿易戦争リスクの後退により今年は世界成長が加速すると考えている。 レポートリンク： On Oil, Growth And The Dollar - January 10, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 Place A Limit Sell On DXY At 100 - November 15, 2019 ユーロ チャート II-3 EUR テクニカル 1 EURのテクニカル指標 1 EURのテクニカル指標 1 チャート II-4 EUR テクニカル 2 EURのテクニカル分析 2 EURのテクニカル分析 2 ユーロ圏の最近のデータは概ねポジティブである： 経常収支は11月に339億ユーロとなった。 ヘッドラインとコアのインフレ率はともに12月に前年比1.3%で横ばいだった。 ZEW景況感調査は1月に11.2から25.6へ急上昇した。 ユーロは今週対米ドルで0.8%下落した。木曜日にECBは政策金利を-0.5%で据え置いた。ECBの最大の示唆は、彼らが金融政策目標の見直しに取り組んでおり、それがより緩和的な姿勢の増加につながる可能性があるという点だ。明示的な2%インフレ目標への切り替えや量的緩和の判断に気候変動目標を組み入れることは、はるかにハト派的なECBの到来を告げる。長期のEUR/CADのストップを1.42へ引き締めている。 レポートリンク： Updating Our Balance Of Payments Monitor - November 29, 2019 On Money Velocity, EUR/USD And Silver - October 11, 2019 A Few Trade Ideas - Sept. 27, 2019 日本円 チャート II-5 JPY テクニカル 1 JPYのテクニカル1 JPYのテクニカル1 チャート II-6 JPY テクニカル 2 JPY テクニカル分析 2 JPY テクニカル分析 2 日本の最近のデータは軟調である： 鉱工業生産は11月に前年同月比で8.2%減少した。 貿易収支は12月に1525億円の赤字に拡大した。輸出入はそれぞれ前年同月比で4.9%および6.3%減少した。 全産業活動指数は11月に前月比0.9%上昇した。 一致指数と先行指数は11月にそれぞれ94.7と90.8に低下した。 日本円は今週対米ドルで0.3%上昇した。日銀は予想通り政策金利を据え置いた。より重要なのは、見通し報告が2020会計年度の成長見通しを0.7%から0.9%に上方修正したことだ。さらに日銀は原油安を受けてインフレ見通しを10ベーシスポイント下方修正した。日本円に関する詳しい分析は本号の前半を参照されたい。 レポートリンク： Updating Our Balance Of Payments Monitor - November 29, 2019 Signposts For A Reversal In The Dollar Bull Market - November 1, 2019 A Few Trade Ideas - Sept. 27, 2019 英ポンド チャート II-7 GBP テクニカル 1 GBP テクニカル 1 GBP テクニカル 1 チャート II-8 GBP テクニカル 2 GBP テクニカル分析 2 GBP テクニカル分析 2 英国の最近のデータはポジティブである： 小売売上高は12月に前年同月比で0.9%増加した。 Rightmoveの住宅価格指数は1月に前年同月比で2.7%上昇した。 ILO方式の失業率は11月に3.8%で横ばいだった。 平均賃金は11月に前年同月比で3.2%増加した。これは2019年の大半で低迷していた雇用報告の後、3か月で就業者が20.8万人改善したことに続く。 英ポンドは今週対米ドルで0.7%上昇した。今後数週間で欧州通貨の最大のボラティリティはEUR/GBPクロスで生じる可能性が高い。欧州の経済データはベース効果もあってここ数週間で最も良いポジティブサプライズを示している。しかし今週のECB議事録は通貨の強さに対して牽制する姿勢を示唆している。英国では当面ポンドは政治の影響を部分的に受けるだろう。GBPおよびEURのボラティリティを買うのは良い賭けに見える。 レポートリンク： Updating Our Balance Of Payments Monitor - November 29, 2019 A Few Trade Ideas - Sept. 27, 2019 United Kingdom: Cyclical Slowdown Or Structural Malaise? - Sept. 20, 2019 オーストラリアドル チャート II-9 AUD テクニカル 1 AUD テクニカル分析 1 AUD テクニカル分析 1 チャート II-10 AUD テクニカル 2 AUDのテクニカル分析 2 AUDのテクニカル分析 2 オーストラリアの最近のデータはポジティブである： Westpac消費者信頼感指数は1月に1.8%低下した。 消費者のインフレ期待は1月に4%から4.7%へ上昇した。 12月には28.9Kの雇用が創出され、コンセンサスを上回った。これは29.2Kのパートタイム雇用増だがフルタイムは0.3K減少した。 参加率は12月に66%で横ばい、失業率はさらに低下して5.1%となった。 オーストラリアドルは今週対米ドルで0.6%下落した。ポジティブな雇用報告はAUDを支えたが、コロナウイルスの懸念がヘッドラインを支配し始めるとすぐに薄れた。我々は先週AUDを詳述し、68セントで買い手だ。主な根拠は強力な逆張りの賭けであるためだ。 レポートリンク： On AUD And CNY - January 17, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 A Contrarian View On The Australian Dollar - May 24, 2019 ニュージーランドドル チャート II-11 NZD テクニカル 1 NZDテクニカル 1 NZDテクニカル 1 チャート II-12 NZD テクニカル 2 NZDテクニカル分析 2 NZDテクニカル分析 2 ニュージーランドの最近のデータは弱含みである： 訪問者数は11月に前年同月比で3.5%減少した。 純移民は11月に3400から2610へ減少した。 パフォーマンスサービス指数は12月に52.9から51.9へ低下した。 ニュージーランドドルは今週対米ドルで0.5%下落した。我々はキウイが世界成長の改善の中で今年は米ドルをアウトパフォームすると考えているが、純移民の減少など国内制約が上昇余地を制限する可能性がある。AUD/NZDとSEK/NZDはロングを維持する。 レポートリンク： Updating Our Balance Of Payments Monitor - November 29, 2019 Place A Limit Sell On DXY At 100 - November 15, 2019 USD/CNY And Market Turbulence - August 9, 2019 カナダドル チャート II-13 CAD テクニカル 1 CADのテクニカル分析 1 CADのテクニカル分析 1 チャート II-14 CAD テクニカル 2 CADのテクニカル指標 2 CADのテクニカル指標 2 カナダの最近のデータは軟調である： 製造業売上高は11月に前月比で0.6%減少した。 ヘッドラインのインフレ率は12月に前年比2.2%で横ばいだった。コアインフレは12月に1.9%から1.7%へ低下した。 新築住宅価格は12月に前年同月比で0.1%上昇した。 カナダドルは今週対米ドルで0.8%下落した。水曜日にカナダ銀行は利率を据え置くことを決めたが、カナダのデータが失望すれば今年後半に利下げの可能性を開く余地を残した。要するに他の多くの中央銀行と同様に、カナダ銀行もデータ依存だ。我々のCADに関するストーリーは単純で、成長リバウンドの震源地が米国外にあるならCADは対極の通貨に対して下振れするということだ。AUD/CADはロングを維持する。 レポートリンク： The Loonie: Upside Versus The Dollar, But Downside At The Crosses Updating Our Balance Of Payments Monitor - November 29, 2019 Making Money With Petrocurrencies - November 8, 2019 スイスフラン チャート II-15 CHF テクニカル 1 CHF テクニカル 1 CHF テクニカル 1 チャート II-16 CHF テクニカル 2 CHF テクニカルズ 2 CHF テクニカルズ 2 今週スイスからのデータは乏しかった： 生産者物価は12月に前年同月比で1.7%下落し、前月の2.5%減から改善した。 マネーサプライ（M3）は12月に前年同月比で0.7%増加した。 スイスフランは今週対米ドルでほぼ横ばいだった。我々は世界的リスクが持続する限りスイスフランを支持し続ける、コロナウイルスへの懸念を含めて。しかし、本レポート前半で議論したように、現時点では円の方がフランよりも優れたヘッジである。 レポートリンク： Updating Our Balance Of Payments Monitor - November 29, 2019 Notes On The SNB - October 4, 2019 What To Do About The Swiss Franc? - May 17, 2019 ノルウェークローネ チャート II-17 NOK テクニカル 1 NOK テクニカル指標 1 NOK テクニカル指標 1 チャート II-18 NOK テクニカル 2 NOK テクニカルズ 2 NOK テクニカルズ 2 今週ノルウェーからのデータは乏しかった： 労働力調査は11月に失業率が4%に上昇したと記録した。 ノルウェークローネは今週エネルギー価格の下落を受けて対米ドルで1.3%下落した。木曜日にノルゲス銀行は政策金利を1.5%で据え置き、広く予想されていたとおりだった。さらにオイステイン・オルセン総裁は「委員会の現在の見通しとリスクのバランス評価は、政策金利が当面現在の水準のままである可能性が高いことを示している」と述べ、短期的な政策変更の可能性を示唆しなかった。これは今後は政策決定よりも相対的なファンダメンタルズがNOKの進路を決めることを示唆している。我々のバイアスはバリュエーションのクッションがロングNOKの安全マージンを提供しているというものだ。USD/NOKとCAD/NOKはショートを維持する。 レポートリンク： On Oil, Growth And The Dollar - January 10, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 Making Money With Petrocurrencies - November 8, 2019 スウェーデンクローナ チャート II-19 SEK テクニカル 1 SEKのテクニカル1 SEKのテクニカル1 チャート II-20 SEK テクニカル 2 SEK テクニカル指標 2 SEK テクニカル指標 2 今週スウェーデンからのデータは乏しかった： 11月に6%から6.8%へ上昇した後、失業率は12月に6%へ戻った。 スウェーデンクローナは今週対米ドルで0.2%下落した。今後は世界成長の改善、貿易緊張の緩和、短期的な景気後退懸念の後退がスウェーデン経済とクローナを下支えする。SEKは世界的な製造業のリバウンドをプレイするための最も有力なG10クロスである。 レポートリンク： Updating Our Balance Of Payments Monitor - November 29, 2019 Where To Next For The US Dollar? - June 7, 2019 Balance Of Payments Across The G10 - February 15, 2019 トレードと予想 予想サマリー コアポートフォリオ タクティカルトレード 指値注文 決済済みトレード

Highlights Remain short the DXY index. The key risk to this view is a US-led rebound in global growth, or a pickup in US inflation that tilts the Federal Reserve to a relatively more hawkish bias. Stay long a petrocurrency basket. The latest flare-up in US-Iran tensions is just a call option to an already bullish oil backdrop. Watch the performance of cyclicals versus defensives and non-US markets versus the S&P 500 as important barometers for maintaining a pro-cyclical stance. Feature The consensus view is rapidly converging to the fact that the dollar is on the precipice of a decline, and cyclical currencies are bound to outperform. This is good news for our forecast but bad news for strategy. The fact that speculators are now aggressively reducing long dollar positions, one of our favorite contrarian indicators, is disconcerting (Chart I-1). The dollar tends to be a momentum currency, so our inclination is to stay the course on short dollar positions (Chart I-2). That said, we are not dogmatic. In FX, momentum investors eventually get vilified, while contrarians get vindicated. This suggests revisiting the core risks to our view, especially in light of recent market developments. Chart I-1A Consensus Trade? Chart I-2The Dollar Is A Momentum Currency An Oil Spike: US Dollar Bullish Or Bearish? The latest story on the global macro front is the possibility of an oil spike, driven by escalation in US-Iran tensions. Our geopolitical strategists believe that while Middle East tensions are likely to remain elevated for years to come, a full-scale war is not imminent.1 This view is fomented by a few key factors. First, the Iranian response to the assassination of Qasem Soleimani was relatively muted, given no US lives were claimed. This was also reinforced by the Iranian foreign minister’s claim that the actions were concluded. As we go to press, the Kyiv-bound Ukrainian aircraft that crashed in Tehran is being characterised as an “act of God” so far. In a nutshell, this suggests de-escalation. Second, sanctions against Iran have been causing real economic pain, given rampant youth unemployment and falling government revenues. This means that Tehran will have to be strategic in any confrontation with the US, since the risks domestically are asymmetrically negative. Renegotiating a new nuclear deal seems like a better bargaining chip than an all-out war. The dollar tends to be a momentum currency, so our inclination is to stay the course on short dollar positions. The biggest risk for oil prices is the possibility of a more marked drop in Iranian production, or possibly the closure of the Strait of Hormuz, though this is a low-probability event for the moment (Chart I-3). Our commodity strategists posit that while a closure of the strait could catapult prices to $100/bbl, there are some near-term offsetting factors.2 These include strategic petroleum reserves in both China and the US, as well as OPEC spare capacity that could benefit from the newly expanded pipeline to the port of Yanbu. This suggests that a flare up in US-Iran tensions remains a call option rather than a catalyst on an already bullish oil demand/supply backdrop. Chart I-3The Risk From Iran Risks to oil demand remain firmly tilted to the upside. Oil demand tends to follow the ebb and flow of the business cycle. Transport constitutes the largest share of global petroleum demand. Ergo the trade slowdown brought a lot of freighters, bulk ships, large crude carriers, and heavy trucks to a halt (Chart I-4). Any increase in oil demand will be on the back of two positive supply-side developments. First, OPEC spare capacity remains a buffer but is very low, meaning any rebound in oil demand in the order of 1.5%-2% (our base case), will seriously begin to bump up against supply-side constraints. Not to mention, unplanned outages typically wipe out 1.5%-2% of global oil supply. Any such occurrence in 2020 will nudge the oil market dangerously close to a negative supply shock (Chart I-5). Chart I-4Oil Demand And Global Growth Chart I-5Opec Spare Capacity Is Low Traditionally, a pick-up in oil prices has tended to be bearish for the US dollar. In theory, rising oil prices allow for increased government spending in oil-producing countries, making room for the resident central bank to tighten monetary policy. This is usually bullish for the currency. An increase in oil prices also implies rising terms of trade, which further increases the fair value of the exchange rate. Balance-of-payment dynamics also tend to improve during oil bull markets. Altogether, these forces combine to become powerful undercurrents for petrocurrencies. That said, it is important to distinguish between malignant and benign oil price increases. There have been many recessions preceded by an oil price spike, and rising prices on the back of escalating tensions are not a recipe for being bullish petrocurrencies. That said, absent any escalating tensions or a marked pickup in global demand, which is not our base case, the rise in oil prices should be of the benign variety – pinning Brent towards $75/bbl. OPEC spare capacity remains a buffer but is very low, meaning any rebound in oil demand in the order of 1.5%-2% (our base case), will seriously begin to bump up against supply-side constraints. In terms of country implications, rising oil prices will go a long way towards improving Canada’s and Norway’s trade balances. In the case of Norway, net trade fell in 2019 due to lower exports of oil and natural gas, but still stands at 5.1% of GDP. The trade balance is the primary driver of the current account balance, and the latter now stands at 4.4% of GDP. On the other hand, the Canadian trade deficit has been hovering near -1% of GDP over the past few years. Further improvement in energy product sales will require an improvement in pipeline capacity and a smaller gap between Western Canadian Select (WCS) and Brent crude oil prices (Chart I-6). We are bullish both the loonie and Norwegian krone, but have a short CAD/NOK trade as high-conviction bet on diverging economic fundamentals. Chart I-6NOK Will Outperform CAD Shifting Correlation Even though rising oil prices tend to be bullish for petrocurrencies, being long versus the US dollar requires an appropriate timing signal for a downleg in the greenback. With the US shale revolution grabbing production market share from both OPEC and non-OPEC producing countries, there has been a divergence between the price of oil and the performance of petrocurrencies. In short, as the now-largest oil producer in the world, the US dollar is itself becoming a petrocurrency (Chart I-7).  Chart I-7Shifting Landscape For Petrocurrencies This is especially pivotal as the US inches towards becoming a net exporter of oil. Put another way, rising oil prices benefit the US industrial base much more than in the past, while the benefits for countries like Canada and Mexico are slowly fading. The strategy going forward will be twofold. First, buying a petrocurrency basket versus the dollar will require perfect timing in the dollar down-leg. Another strategy is to be long a basket of oil producers versus oil consumers. We are long an oil currency basket versus the euro as a dollar neutral way of benefitting from rising oil prices. Chart I-8 shows that a currency basket of oil producers versus consumers has both had a strong positive correlation with the oil price and has outperformed a traditional petrocurrency basket. Chart I-8Buy Oil Producers Versus Oil Consumers Risks To The View Above all, the dollar remains a counter-cyclical currency. As such, when global growth rebounds, more cyclical economies benefit most from this growth dividend, and capital tends to gravitate to their respective economies. This holds true for global oil and gas sectors that tend to have a higher concentration outside of US bourses. As such, one key risk is that if the S&P 500 keeps outperforming oil, as has been the case over the past decade, the dollar is unlikely to weaken meaningfully (Chart I-9). We understand this is a call on sectors (US tech especially), rather than relative growth profiles, but what matters for currencies is the impulse of capital flows. That said, improving global growth should allow EM energy consumption (a key driver of oil prices), to pick up. Chart I-9Oil Prices And The Stock Market The second risk is a pickup in US inflation expectations that tilts the Fed towards a relatively more hawkish bias. The economic linkage between US inflation and oil is weak, but financial markets assign a strong correlation to the link (Chart I-10). In our view, given that higher gasoline prices tend to hurt US retail sales, and the consumer is the most important driver of the US economy, higher oil prices can only be inflationary if the overall US economy is also robust (Chart I-11). This combination is unlikely to occur if rising oil prices are being driven by a flare-up in geopolitical tensions.   Chart I-10A Rise In Oil Prices Will Help Inflation Expectations Chart I-11Gasoline Prices And US Consumption A US inflation spike in 2020 is a low-probability event. There have been two powerful disinflationary forces in the US. The first is the lagged effect from the Fed’s tightening policies in 2018. This is especially important given that the fed funds rate was eerily close to the neutral rate of interest, providing little incentive for firms to borrow and invest. This was further exacerbated by the trade war. Inflation is a lagging indicator, and it will take a sustained rise in economic vigor to lift US inflation expectations. This will not be a story for 2020 (Chart I-12). Meanwhile, the recent rise in the dollar and fall in commodity prices are likely to continue to anchor US inflation expectations downward, which should keep the Fed on the sidelines. Chart I-12Velocity Of Money Versus Inflation The gaping wedge between the US Markit and ISM PMIs remains a cause for concern. Given sampling differences, where the Markit PMI surveys more domestically-oriented firms, it is fair to assume it is also a barometer of US domestic growth relative to global output. Put another way, whenever the US services PMI is outperforming its manufacturing component, the dollar tends to appreciate (Chart I-13). Looking across global PMIs, there has been a notable pickup in Asia, specifically in Korea, Taiwan and Singapore, though weakness in Japan and Europe has persisted. This warrants close monitoring. Chart I-13The Risk To A Bearish Dollar View We continue to view further deceleration in the global manufacturing sector as a tail risk rather than our base case. Trade tensions have receded, global central banks remain very dovish, and Brexit uncertainty has diminished. This should allow global CEOs to begin deploying capital, on the back of pent-up investment spending. More importantly, the slowdown in the global economy has been driven by the manufacturing sector, so it is fair to assume that this is the part of the economy that is ripe for mean reversion. On the political spectrum, it has been historically rare for the Fed to raise interest rates a few months ahead of an election cycle, which should allow a weaker dollar to help grease the global growth supply chain. Any pickup in global manufacturing activity will allow the Riksbank to adopt a more hawkish bias, narrowing interest rate differentials between Norway and Sweden.  Bottom Line: The key risk to a bearish dollar view is a US-led global growth rebound, allowing the Fed to adopt a much more hawkish stance relative to other central banks. This would be an environment in which US inflation would also surprise to the upside. So far, this remains a tail risk. Housekeeping We will soon be taking profits on our long NOK/SEK position. Reduce the target to 1.09 and tighten the stop to 1.06. Any pickup in global manufacturing activity will allow the Riksbank to adopt a more hawkish bias, narrowing interest rate differentials between Norway and Sweden. Most importantly, the cross will approach a profitable technical level in the coming weeks, on the back of our call a few weeks ago to rebuy the pair (Chart I-14). 2020 will be a year of much more tactical calls. Stay tuned. Chart I-14Take Profits On NOK/SEK Soon   Chester Ntonifor Foreign Exchange Strategist chestern@bcaresearch.com Footnotes 1  Please see Geopolitical Strategy Special Alert "A Reprieve Amid The Bull Market In Iran Tensions," dated January 8, 2020, available at gps.bcaresearch.com 2 Please see Commodity & Energy Strategy Weekly Report "Iran Responds To US Strike; Oil Markets Remain Taut," dated January 9, 2020, available at uses.bcaresearch.com Currencies U.S. Dollar Chart II-1USD Technicals 1 Chart II-2USD Technicals 2 Recent data in the US have been robust: ISM manufacturing PMI fell to 47.2 from 48.1 in December. However, Markit and ISM services PMIs both increased to 52.8 and 55, respectively.  The trade deficit narrowed by $3.8 billion to $43.1 billion in November. ADP recorded an increase of 202K workers in December, the largest increase since April. Initial jobless claims fell from 223K to 214K, better than expected. MBA mortgage applications soared by 13.5% for the week ended December 27th. The DXY index recovered by 0.7% this week from its recent decline. Trump's speech has eased tensions between the US and Iran, making an escalation towards a full-scale war unlikely. Moreover, recent data point to a continued expansion in the US through 2020. That being said, we believe that the global growth will outpace the US, which is bearish for the dollar, but this is an important risk to monitor. Tomorrow’s payroll report will be an important barometer. Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 Place A Limit Sell On DXY At 100 - November 15, 2019 Signposts For A Reversal In The Dollar Bull Market - November 1, 2019 The Euro Chart II-3EUR Technicals 1 Chart II-4EUR Technicals 2 Recent data in the euro area have been positive: Markit services PMI increased to 52.8 from 52.4 in December. Headline inflation jumped to 1.3% year-on-year from 1% in December, while core inflation was unchanged at 1.3%.  Retail sales accelerated by 2.2% year-on-year in November, from 1.7% the previous month. The Sentix investor confidence soared to 7.6 from 0.7 in January. The expectations versus the current situation component continues to point to an improving PMI over the next six months. EUR/USD fell by 0.7% this week. Recent data from the euro area have been consistent with our base case view that the euro area economy is rebounding, and is likely to accelerate in 2020. We remain long the euro, especially against the CAD. Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 On Money Velocity, EUR/USD And Silver - October 11, 2019 A Few Trade Ideas - Sept. 27, 2019 Japanese Yen Chart II-5JPY Technicals 1 Chart II-6JPY Technicals 2 Recent data in Japan have been disappointing: The manufacturing PMI fell slightly to 48.4 from 48.8 in December; the services PMI also fell to 49.4 from 50.3 in December. Labor cash earnings fell by 0.2% year-on-year in November. Consumer confidence increased to 39.1 from 38.7 in December. USD/JPY increased by 1.2% this week. The Japanese yen initially surged on the back of US-Iran headlines, then fell as tensions faded after Trump's speech. While we don't expect a full-scale war between the US and Iran for the moment, geopolitical risks will likely persist before the elections later this year. We continue to recommend the Japanese yen as a safe-haven hedge, though our long position is currently out of the money. Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 Signposts For A Reversal In The Dollar Bull Market - November 1, 2019 A Few Trade Ideas - Sept. 27, 2019 British Pound Chart II-7GBP Technicals 1 Chart II-8GBP Technicals 2 Recent data in the UK have been positive: Nationwide housing prices increased by 1.4% year-on-year in December. Halifax house prices also grew by 4% year-on-year in December. Markit services PMI surged to 50 from 49 in December. The British pound fell by 0.4% against the US dollar this week. On Thursday, BoE Governor Mark Carney said in a speech that “with the relatively limited space to cut the Bank Rate, if evidence builds that the weakness in activity could persist, risk management considerations would favor a relatively prompt response.” This has been viewed by the market as dovish and the pound fell on the message. In the long term, we like the pound as Brexit risk fades. In other news, the BoE has announced Andrew Bailey as the successor to Mark Carney, scheduled to take over in March 2020. Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 A Few Trade Ideas - Sept. 27, 2019 United Kingdon: Cyclical Slowdown Or Structural Malaise? - Sept. 20, 2019 Australian Dollar Chart II-9AUD Technicals 1 Chart II-10AUD Technicals 2 Recent data in Australia have been positive: The Commonwealth bank services PMI increased to 49.8 from 49.5 in December. Moreover, the AiG manufacturing index slightly increased to 48.3 from 48.1. Building permits fell by 3.8% year-on-year in November. On a monthly basis however, it increased by 11.8%. Exports increased by 2% month-on-month in November, while imports fell by 3%. The trade surplus widened to A$5.8 billion. The Australian dollar plunged by 1.5% against the US dollar amid broad US dollar strength this week. The Aussie is the weakest currency so far this year.  This is especially the case given demand destruction from the ongoing severe bushfires in Australia. On the positive side, a weaker Australian dollar could support exports and the current account as international trade picks up in 2020. The extent of fiscal stimulus will be an important wildcard for both the RBA and the AUD. Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 A Contrarian View On The Australian Dollar - May 24, 2019 Beware Of Diminishing Marginal Returns - April 19, 2019 New Zealand Dollar Chart II-11NZD Technicals 1 Chart II-12NZD Technicals 2 Recent data in New Zealand have been mostly positive: House prices increased by 4% year-on-year in December.  The ANZ commodity price index fell by 2.8% in December. The New Zealand dollar fell by 1% against the US dollar this week. On January 1st, China's central bank announced that it would inject additional liquidity into the economy. This is bullish for global growth along with a "Phase I" trade deal. As a small open economy, New Zealand is one of the countries that will benefit the most from a global growth recovery. We will be monitoring whether the scope for improvement in agricultural commodity prices is bigger than that for bulks, which underscores our long AUD/NZD position. Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 Place A Limit Sell On DXY At 100 - November 15, 2019 USD/CNY And Market Turbulence - August 9, 2019 Canadian Dollar Chart II-13CAD Technicals 1 Chart II-14CAD Technicals 2 Recent data in Canada have been negative: Exports fell slightly by C$0.7 million in November. Imports also fell by C$1.2 million, which led to a narrower trade deficit of C$1.1 billion. Ivey PMI dropped sharply to 51.9 from 60 in December. Housing starts fell to 197K from 204K in December. Building permits also fell by 2.4% month-on-month in November. The Canadian dollar fell by 0.5% against the US dollar along with the decline in energy prices this week, erasing the gains earlier this year. While we expect the Canadian dollar to outperform the US dollar from a cyclical perspective, the CAD is likely to underperform against other cyclical currencies as global growth picks up steam through 2020. Report Links: The Loonie: Upside Versus The Dollar, But Downside At The Crosses Updating Our Balance Of Payments Monitor - November 29, 2019 Making Money With Petrocurrencies - November 8, 2019 Swiss Franc Chart II-15CHF Technicals 1 Chart II-16CHF Technicals 2 Recent data in Switzerland have been positive: The manufacturing PMI rose to 50.2 from 48.8 in December, the first expansion since March 2019, mainly driven by increases in both production and new orders. Headline inflation shifted back to positive territory at 0.2% year-on-year in December, following negative prints for the past two consecutive months.  Real retail sales were unchanged in November on a year-on-year basis. The Swiss franc was little changed against the US dollar this week, while it rose against other major currencies including the euro on the back of positive PMI and inflation data. More importantly, recent Middle East tensions have reignited safe-haven demand, increasing bids for the Swiss franc. Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 Notes On The SNB - October 4, 2019 What To Do About The Swiss Franc? - May 17, 2019 Norwegian Krone Chart II-17NOK Technicals 1 Chart II-18NOK Technicals 2 Recent data in Norway have been positive: The unemployment rate fell further to 3.8% from 3.9% in October. The Norwegian krone has been fluctuating with the ebb and flow of US-Iran tensions and oil prices. This week it fell by 0.8% against the US dollar after Trump implied that both the US and Iran are backing off from an escalation into war. Moreover, the bearish oil inventory data from EIA managed to pull down oil prices even further. Despite the recent fluctuation in oil prices, we maintain an overweight stance on a cyclical basis based on a global growth recovery in 2020.  Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 Making Money With Petrocurrencies - November 8, 2019 A Few Trade Ideas - Sept. 27, 2019 Swedish Krona Chart II-19SEK Technicals 1 Chart II-20SEK Technicals 2 There has been scant data from Sweden this week:  Retail sales increased by 1.3% year-on-year in November. On a month-on-month basis however, it fell by 0.4% compared with October. The Swedish krona fell by 0.8% against the US dollar this week amid broad dollar strength. Despite rising geopolitical tensions, we remain optimistic and expect the global economy to recover this year given the US-China trade détente and increasing stimulus from China. The Swedish krona is poised to rise with global growth and a stronger manufacturing sector. Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 Where To Next For The US Dollar? - June 7, 2019 Balance Of Payments Across The G10 - February 15, 2019 Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Limit Orders Closed Trades

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Highlights Go short the DXY index with a target of 90 and a stop loss of 100. The top-performing G10 currencies in 2020 will be the NOK and SEK. Remain short USD/JPY as portfolio insurance. USD/JPY and the DXY are usually positively correlated. A weak dollar will lend support to gold prices. Gold will also benefit from abundant liquidity and persistently low/negative real rates. EUR/USD should touch 1.18, while GBP/USD will retest 1.40. There are abundant trade opportunities at the crosses. Our favorites are long AUD/NZD and short CAD/NOK. Feature The DXY index has been trading on the weaker side in recent months and is breaking below the upward-sloped channel in place since the middle of last year. In a nutshell, the performance of the dollar DXY index has been unimpressive for this year (Chart 1). The decisive break down represents an important fundamental shift, since the next level of support lies all the way towards the 90-92 zone. Given additional confirmation from a few of our indicators in recent weeks, we are selling the DXY at current levels, with a tight stop at 100. Chart 1A Report Card On Currency Performance Green Shoots On Global Growth Frequent readers of our bulletin are well aware of the observation that the dollar is a countercyclical currency. As such, when global growth is rebounding, more cyclical economies benefit most from this growth dividend. This tends to weaken the dollar. Recent data confirms that this trend remains firmly intact. We expect continued improvement in both the ISM and global manufacturing PMI, but for now, the message is that the epicenter of the growth recovery is from outside the US. Chart 2Major Dollar Tailwinds Have Peaked We expect continued improvement in both the ISM and global manufacturing PMI, but for now, the message is that the epicenter of the growth recovery is from outside the US (Chart 2). This has typically been synonymous with a lower dollar. In the euro area, the expectations components of the ZEW and Sentix surveys continue to outpace current conditions, which tends to lead European PMIs by about six months. It is becoming more and more evident that we will be out of a manufacturing recession in the euro area early next year (Chart 3). Chinese imports surprised to the upside for the month of November, in line with the message from easing in financial conditions (Chart 4). Should stimulus continue to be frontloaded into next year, this should continue to support global growth. The perk-up in copper prices is a good confirmatory signal. Chart 3A V-Shaped Recovery In European Manufacturing Chart 4Chinese Growth Will Benefit From Stimulus Japanese GDP saw a big upward revision for the third quarter, and a few leading indicators suggest nascent green shoots despite the October consumption tax hike. A new fiscal package was announced recently and should go a long way in boosting domestic demand (Chart 5). Chart 5Japanese Growth Chart 6USD/SEK Has Peaked The currencies of small, open economies such as the SEK and the NZD have started to stage meaningful reversals. These currencies are usually good at sensing shifts in the investment landscape, and our suspicion is that they were primary funding vehicles for long USD trades (Chart 6). The slowdown in the global economy has been driven by the manufacturing sector, so it is fair to assume that this is the part of the economy that is ripe for mean reversion. Not to mention, cyclical swings in most economies tend to be driven by manufacturing and exports rather than services. More specifically, the currencies that have borne the brunt of the manufacturing slowdown should also experience the quickest reversals. This is already being manifested in a very steep rise in their bond yields vis-à-vis those in the US (Chart 7A and 7B). For example, yields in Norway, Sweden, Switzerland and Japan have risen significantly versus those in the US since the bottom. Should the nascent pickup in global growth morph into a synchronized recovery, this will go a long way in further eroding the US’s yield advantage. Chart 7AInterest Differentials And Exchange Rates Chart 7BInterest Differentials And Exchange Rates The key risk to a bearish dollar view is a US-led global growth rebound, allowing the Federal Reserve to adopt a much more hawkish stance relative to other central banks. This would be an environment in which US inflation would also surprise to the upside. This is not our baseline view, especially following the dovish revisions of the Summary of Economic projections made by the Fed this week. Bottom Line: Given further confirmation from a swath of indicators, we are going short the DXY index at current levels with an initial target of 90 and a stop loss at 100.  Go Long SEK Our highest-conviction views on currencies are being long the NOK and SEK.  Our highest-conviction views on currencies are being long the NOK and SEK. This view has been in place for a few months via other crosses, but we are taking the leap today in putting these positions on versus the dollar. Less aggressive investors can still stick to NOK and SEK trades as the crosses. Chart 8Soft Data Is Much Worse Of all the G10 currencies we follow, the Swedish krona is probably the most perplexing. The Riksbank is one of the few central banks to have raised rates this year, but the krona remains the weakest G10 currency. Admittedly, the performance of the Swedish manufacturing sector has been dismal, especially so in October (Chart 8). That said, the euro area, which has also experienced a deep manufacturing recession, has seen a better currency performance this year despite a more dovish European Central Bank. The big question for Sweden is whether the manufacturing sector is just in a volatile bottoming process, or about to contract much further. Domestically, retail sales were strong for the month of October and inflation is surprising to the upside. Exchange rates tend to be extremely fluid in discounting a wide swath of economic data, and in the case of Sweden, in discounting the outcome for global growth. This suggests that the quick reversals in the EUR/SEK and USD/SEK – from levels close to or above their 2008 highs – means that it will take anything but a deep recession to justify a weaker krona.  Bottom Line: In terms of SEK trading strategy, short USD/SEK and short NZD/SEK are good bets, since the SEK has a higher beta to global growth than the US dollar and the kiwi (Sweden exports 45% of its GDP versus 27% for New Zealand). However, an additional trade suggestion is to go short EUR/SEK for Europe-centric investors. Go Long NOK As Well Chart 9Opportunity Or Regime Shift? Since the middle of the last decade, another perplexing disconnect has been the divergence between the price of oil and the performance of petrocurrencies. From the 2016 bottom, oil prices have more than doubled, but the petrocurrency basket has massively underperformed versus the US dollar (Chart 9).  We agree with our commodity strategists that the outlook for oil prices is to the upside. Oil demand tends to follow the ebbs and flows of the business cycle, with demand having slowed sharply on the back of a manufacturing recession. Transport constitutes the largest share of global petroleum demand. A manufacturing pickup will therefore boost oil demand. Rising oil prices are bullish for petrocurrencies but being long versus the US dollar is no longer an appropriate strategy. This is because the landscape for oil production is rapidly shifting, with the US shale revolution grabbing market share from both OPEC and non-OPEC members. In 2010, only about 6% of global crude output came from the US. Fast forward to today and the US produces almost 15% of global crude, having grabbed market share from many other countries. In short, as the now-largest oil producer in the world, the US dollar is itself becoming a petrocurrency (Chart 10). Chart 10US Has Grabbed Oil Production Market Share Chart 11Buy Oil Producers Versus Oil Consumers The strategy going forward will be twofold. First, buying a petrocurrency basket versus the dollar will require perfect timing in the dollar down leg. The second strategy is to be long a basket of oil producers versus oil consumers. Chart 11 shows that a currency basket of oil producers versus consumers has had both a strong positive correlation with the oil price and has outperformed a traditional petrocurrency basket. Our recommendation is that NOK long positions should be played both via selling the CAD and USD (Chart 12). The discount between Western Canadian Select crude oil and Brent has also widened, which has historically heralded a lower CAD/NOK exchange rate (Chart 13). We are also long the NOK/SEK, given our belief that interest rate differentials and momentum will favor this cross over the next three months.   Chart 12CAD/NOK And DXY Chart 13NOK Will Outperform CAD Bottom Line: Remain short CAD/NOK for a trade, but more aggressive investors should begin accumulating long NOK positions versus the US dollar outright. The Yen As Portfolio Insurance Chart 14Short USD/JPY: A Contrarian Bet The yen tends to underperform at the crosses as global growth rebounds but still outperform versus the dollar, at least, until the Bank of Japan is forced to act (Chart 14). This places short USD/JPY bets in an enviable “heads I win, tails I do not lose too much,” position. Economic data from Japan over the past few weeks suggests the economy is weakening, but not fully succumbing to pressures of weak external growth and the consumption tax hike. The labor market remains relatively tight, and Tokyo office vacancies are hitting post-crisis lows, suggesting the demand for labor remains tight. The final print of third-quarter GDP growth rose to 1.8%. Wages are inflecting higher as well. The new fiscal spending package is likely to lend support to these trends.  What these developments suggest is that the BoJ is likely to stand pat in the interim, a course of action that will eventually reignite deflationary pressures in Japan (Chart 15). A return towards falling prices will eventually force the BoJ’s hand, but might see a knee-jerk rise in the yen before. Total annual asset purchases by the BoJ are currently a far cry from the central bank’s soft target of ¥80 trillion, and unlikely to change anytime soon (Chart 16). Chart 15What More Could The BoJ Do? Chart 16Stealth Tapering By The BoJ   It is important to remember why deflation is so pervasive in Japan, making the BoJ’s target of 2% a bit of a pipedream if it stands pat. The overarching theme for prices in Japan is a rapidly falling (and rapidly ageing) population, leading to deficient demand (Chart 17). Meanwhile, domestically, an aging population (that tends to be the growing voting base), prefers falling prices. What is needed is to convince the younger population to save less and consume more, but that is difficult when high debt levels lead to insecurity about the social safety net. On the other side of the coin, the importance of financial stability to the credit intermediation process has been a recurring theme among Japanese policymakers, with the health of the banking sector an important pillar. YCC and negative interest rates have been anathema for Japanese net interest margins and share prices (Chart 18). Any policy shift that is increasingly negative for banks could easily tip them over. This suggests the shock needed for the BoJ to act may be greater than history.  Chart 172% Inflation = Mission Impossible? Chart 18Negative Rates Are Anathema To Banks We believe global growth is bottoming, but the traditional yen/equity correlation can also shift. Inflows into Japan could accelerate, given cheap equity valuations and improved corporate governance that has been lifting the relative return on capital. The propensity of investors to hedge these purchases will be less if the dollar is in a broad-based decline. Bottom Line: An external shock could tip the Japanese economy back into deflation. The risk is that if the dollar falls, the yen remains flat to lower in the interim. Given cheap valuations and a lack of ammunition by the BoJ, our view is that it is a low cost for portfolio insurance. EUR/USD As The Anti-Dollar Our near-term target for EUR/USD is 1.18. This level will retest the downward sloping trendline in place since the Great Financial Crisis (Chart 19). Chart 20 plots the relative growth performance of the euro area versus the US, superimposed with the exchange rate. The result is very evident: The collapse in the euro since the financial crisis has been driven by falling growth differentials between the Eurozone and the US. There is little the central bank can do about deteriorating demographic trends, but it can at the margin stem falling productivity. One of its levers is to lower the cost of capital in the entire Eurozone, such that it makes sense even for the less productive peripheral countries to borrow and invest. Chart 19EUR/USD Chart 20Structural Slowdown In European Growth Importantly, yields across the periphery are rapidly converging towards those in Germany, solving a critical dilemma that has long plagued the Eurozone in general and the euro in particular. In simple terms, ECB policy has historically always been too easy for some member countries while too stimulative for others. This has traditionally led to internal friction for the currency. However, with 10-year government bond yields in France, Spain and even Portugal now close to the neutral rate of interest for the entire Eurozone, this dilemma is slowly fading. Labor market reforms in Mediterranean Europe have seen unit labor costs in Greece, Ireland, Portugal and Spain collectively contract by almost 10%. This has effectively eliminated the competitiveness gap that had accumulated over the past two decades. Italy remains saddled with a rigid and less productive workforce, but overall adjustments have still come a long way to closing a key fissure plaguing the common currency area. Earnings estimates for euro zone equities versus the US are rising. This tends to firmly lead the euro by about nine to 12 months, suggesting we are due for a pop in the coming quarters. Chart 21Relative R-Star* In The Eurozone Could Rebound The bottom line is that the various forces that may have been keeping the neutral rate of interest artificially low in the euro area are ebbing. The proverbial saying is that a chain is only as strong as its weakest link. This means that if the forces pressuring equilibrium rates in the periphery are slowly dissipating, this should lift the neutral rate of interest in the entire euro zone. Over a cyclical horizon, this should be bullish for the euro (Chart 21). Bottom Line: European equities, especially those in the periphery, remain unloved, given they are trading at some of the cheapest cyclically adjusted price-to-earnings multiples in the developed world. Earnings estimates for euro zone equities versus the US are rising. This tends to firmly lead the euro by about nine to 12 months, suggesting we are due for a pop in the coming quarters (Chart 22). Chart 22The Euro Might Soon Pop Concluding Thoughts Being long Treasurys and the dollar has been a consensus trade for many years now (Chart 23). According to CFTC data, this has been expressed mostly through the aussie and kiwi, although our bias is that the Swedish krona and Norwegian krone have been the real victims. Chart 23Unfavorable Dollar Technicals Chart 24The US Dollar Is Overvalued Various models have shown valuation to be a very poor tool for managing currencies, but an excellent one at extremes (Chart 24). The results show the US dollar as overvalued, especially versus the Swedish krona, Japanese yen and Norwegian krone. Commodity currencies are closer to fair value, and within the safe-haven complex the Japanese yen is more attractive than the Swiss franc. The euro is less undervalued than implied by the overvaluation in the DXY index. Finally, we are keeping our long GBP/JPY position for now, but with a new target of 155, and tightening the stop to 145 (near our initial target). Inflows into the UK should improve given more clarity from the political overhang, which can lead to an overshoot in the cross. Reviving global growth will also benefit inflows into sterling assets. On a tactical basis however, EUR/GBP is ripe for mean revision given oversold conditions.   Chester Ntonifor Foreign Exchange Strategist chestern@bcaresearch.com Forecast Summary Core Portfolio Tactical Trades Limit Orders Closed Trades

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Highlights Net inflows into US assets have been rolling over since the beginning of 2019, given that the repatriation associated with the 2017 tax cuts was a one-off effect. Besides, fading interest rate differentials are making US Treasuries less attractive, which is a headwind for the greenback.  A trade war ceasefire between the US and China should improve the balance of payments dynamics for export-oriented nations. We maintain a pro-cyclical stance.  A revival in oil demand and curbs on supply should underpin oil prices through 2020, which could lift the trade balances of Norway and Canada. However, we expect the Canadian dollar to underperform, weighed by pipeline constraints and the divergence between WCS and WTI prices. Stay short CAD/NOK. Feature The balance of payments is one of the key indicators we watch on a regular basis to gauge the direction of exchange rates. While the power of BoP on currency moves differs from one country to another, it provides a big picture view of a country's transactions with other nations. Generally speaking, persistent surpluses are usually associated with appreciation in currencies, and vice versa. Ongoing trade disputes since early 2018 have caused some fluctuation in current account balances globally. Political uncertainties and rising protectionism have also limited foreign investments in some countries. Going forward, should global growth stabilize amid a possible trade détente, export-oriented regions will have more scope to improve their balance of payments dynamics. In what follows we present balance of payments across G10 through five categories: the trade balance, the current account balance, foreign direct investment, the basic balance, and lastly, portfolio investment. United States Chart 1US Balance Of Payments The US trade deficit has been more or less flat, lingering around 3% of GDP. The trade deficit mostly comes from manufactured goods. On the positive side, the US has been producing and exporting more petroleum and related products, which has decreased oil demand from abroad. Meanwhile, exports of pharmaceutical products are on the rise. The current account is at a smaller deficit of 2.5% of GDP, thanks to a positive net international investment position. Foreign direct investment had been increasing due to repatriation by US companies since the 2017 Trump tax cuts. If this one-off tax break was a source of US dollar strength in 2018, that support is now gone. Meanwhile, dollar strength since the beginning of 2018 may have made US assets less attractive to foreign investors. Since the beginning of 2019, net inflows into US assets have been rolling over, and have fallen to 0.9% of GDP. This has brought the US basic balance down to -1.6% of GDP. In terms of portfolio investment, US bond markets are still appealing to foreign investors, but interest rate differentials are moving against the greenback. Total foreign purchases of US Treasury bonds have been negative this year, of which official purchases stand at US$350 billion of net outflows. In short, the path of least resistance for the US dollar is down, due to a widening current account deficit, waning foreign direct investment, fading interest rate differentials and increasing dollar liquidity. Euro Area Chart 2Euro Area Balance Of Payments The slowdown in global trade has hit European exports, but the trade balance is still sporting a “healthy” surplus of 1.7% of GDP, albeit far below its peak. As a result, the current account as of September 2019 was still at a healthy level of 2.7% of GDP. Should a US-China "phase one" deal be finalized, the trade balance in the euro area is likely to rebound going into 2020. Foreign direct investment has been increasing to the point of being at its highest level over the past 20 years, or 1% of GDP. This has been aided in part by the peripheral countries, further evidence that we are getting a convergence in competitiveness across Eurozone countries. The cheap euro and lower cost of capital have helped. As a result, the basic balance for the euro area reached a new high of 3.8% of GDP in September 2019. Portfolio investment into the euro area has stopped deteriorating since the beginning of 2017 and is now sporting net inflows of 0.8% of GDP. European purchases of both foreign equities and foreign bonds are falling, probably a sign that domestic assets are becoming more attractive. For example, ETF inflows are accelerating. The restart of the European Central Bank’s asset purchase program will continue to act as an anchor for spread convergence in the euro area. Meanwhile, a rally in European equities will be another signal of recovery in the euro area. A healthy current account balance and improving foreign investments both signal a higher euro going forward. Japan Chart 3Japanese Balance Of Payments The trade slowdown has dealt a small blow to Japan’s current account balance. The trade deficit widened further in 2019, reaching -0.5% of GDP in Q3. Exports have been falling for a 10th consecutive month, weighed down in part by lower sales of auto parts and semiconductor equipment. But these will pick up should a trade truce be reached. Among its major trading partners, sales to the US, China and other Asian countries have fallen, but have risen in the Middle East and Western Europe. That said, Japan’s large net international investment position has helped keep the current account surplus at an elevated level of 3.4% of GDP. Foreign direct investment in Japan has been dismal for many years due to an offshoring of industrial production. Net FDI is currently standing at -4% of GDP, which has brought the basic balance below zero for the first time since 2016. The recent deceleration is further evidence that corporate Japan needs structural reforms. Portfolio investment remains in negative territory mostly due to Japanese residents' large purchases of foreign long-term bonds. Going forward, fund inflows to Japan could face more headwinds with the proposed change to the Foreign Exchange and Foreign Trade Act. The change aims to lower the minimum stake for foreign investors without government approval from 10% to 1%. Other changes include requiring foreign directors to seek permission before becoming a board member. That said, Japan’s large net international investment position, which produces a high current account surplus, will continue to make the yen a safe haven amid global uncertainties. United Kingdom Chart 4UK Balance Of Payments So far, a cheap pound has not yet staunched the deterioration in UK balance of payments. The UK trade deficit remained wide at 7% of GDP in the third quarter. Among its major trading partners, the trade deficit comes mainly from Germany and China, offset by a smaller surplus from the US, the Netherlands and Ireland. Net receipts are positive, but the current account balance is still in negative territory at -5% of GDP. The Brexit imbroglio has led to an exodus of foreign direct investment. Many international companies are fleeing the UK, but to the extent that we get a quick resolution after the December elections, the uncertainty is likely to subside. Portfolio investment in the UK has been volatile over the past few years and has not really helped dictate any discernable trend in the UK basic balance. More recently, inflows into UK gilts have been £19 billion in the second quarter, while flows into equities are also improving. Relative interest rate differentials are also likely to move in favor of the UK, especially if reduced uncertainty provides scope for the Bank of England to hike interest rates. At a minimum, compared with other European nations, gilts remain appealing to international investors. We remain positive on the pound and are long GBP/JPY in our portfolio. Canada Chart 5Canadian Balance Of Payments The Canadian trade deficit has been hovering near -1% of GDP over the past few years. The goods trade deficit narrowed this year, led mostly by an increase in energy exports and lower imports of transportation equipment. Further improvement in energy product sales will require an improvement in pipeline capacity and a smaller gap between WCS and Brent crude oil prices. The current account deficit has been narrowing, now standing at -2% of GDP, the smallest since 2008. This is helped by net receipts, especially driven by a rise in direct investment income. FDI has been the bright spot in Canadian BoP dynamics. FDI inflows have been in part helped by increased cross- border M&A activities. Net FDI into Canada now accounts for 2.7% of GDP. This has brought the basic balance back above zero for the first time since 2015. Portfolio investment is positive on a net basis, but the trend looks quite worrisome. Foreign entities are fleeing Canada. In the meantime, Canadian investment in foreign securities is on the rise, reaching C$6 billion in Q3. Profitability, liquidity concerns and a global push towards sustainable investing are making Canadian energy and mining companies unappealing for foreign capital. Moreover, with elevated house prices and depressed interest rates, the outlook for banking profitability is also concerning. A drop in the US dollar will help the loonie in the short term. Over the longer term, however, we prefer to be underweight the Canadian dollar, especially via the Australian dollar and the Norwegian krone, which have a better macro outlook. Australia Chart 6Australian Balance Of Payments Australia has seen the best balance of payments improvement among the G10. The Australian trade balance soared this year and now stands at 2.5% of GDP, the highest in several years. Terms of trade, which have increased by 45% since their 2016 bottom, have been one of the main drivers. Exports of iron ore and concentrates increased by 64% year-on-year in September 2019, adding to the positive trade balance. Ergo, Australia is benefitting from both a price and volume boost. Trade has lifted the current account to be on track to post its first surplus since the ‘70s. Going forward, we expect Australian trade to continue improving amid the US-China trade détente. Foreign direct investment dipped slightly in 2019, but from very elevated levels. At present, it still stands at 3.5% of GDP. This has allowed for a very healthy basic balance surplus of 2.9% of GDP. The largest sources of Australian foreign direct investment are the US and the UK. The FDI inflows tend to be concentrated in the mining and manufacturing sectors and generate a negative income balance for Australia. This has been part of the reason behind the country’s chronic current account deficit, but it is impressively becoming less and less important. Portfolio investment in Australia plunged in 2019, and now stands at -4.2% of GDP. This has been driven by an exodus from the bond market. The repatriation of capital back to the US probably helped exacerbate this trend. The Australian dollar is likely to rebound from a contrarian perspective. We are playing Aussie dollar strength via the New Zealand and Canadian dollars. New Zealand Chart 7New Zealand Balance Of Payments New Zealand is also benefitting from a terms-of-trade boost. The trade deficit marginally narrowed to -1.7% of GDP in the third quarter. Exports rose by 4% year-on-year in the third quarter, while imports rose by 3.6% year-on-year. Terms of trade increased in 2019, mainly driven by a rise in dairy and meat prices. It appears the pork crisis in China is benefitting New Zealand exports. As a result, the current account deficit narrowed slightly to 3.4% of GDP. Foreign direct investment in New Zealand rose sharply to 3.1% of GDP, partly driven by reinvestment in the banking sector. This almost brought the basic balance back into positive territory. If this trend continues, it will be the first time the basic balance is in positive territory in two decades. Portfolio investment in New Zealand has been deteriorating, with net outflows of $6.2 billion in the second quarter. This is almost 4% of GDP on an annualized basis. The withdrawal of equity and investment fund shares by foreign entities, as well as divestment of debt securities by the general government, are some of the reasons behind falling portfolio investment. In a nutshell, increased portfolio investment in New Zealand will be predicated on a terms-of-trade shock that boosts margin growth for agricultural exporters, or a policy shift that boosts domestic return on capital. We like the kiwi versus the dollar, but are underweight against its pro-cyclical peers, namely the Australian dollar and the Swedish krona. Switzerland Chart 8Swiss Balance Of Payments The Swiss trade balance has been in a structural surplus, and hugely underpins the nation’s large current account surplus. The improvement this year, a rebound to 5.4% of GDP in the third quarter, is notable. The increase in exports has been partly driven by higher sales of chemical and pharmaceutical products, jewelry, and metals. Combined with income inflows from its large net international investment position, this has produced a current account balance of 10.7% of GDP. The slowdown in foreign direct investment has eased sharply from a record-low of -16% to -8% of GDP. Tax breaks from the US Jobs Act in 2017 allowed for favorable divestment of FDI in Switzerland and repatriation back to the US. This was a one-off that is now behind us, which explains why the basic balance is shifting back into surplus territory, to the tune of 2.5% of GDP.  Portfolio investment has been gradually improving and now stands at 0.3% of GDP. Swiss paper and equities (which are defensive) have benefitted from increased safe-haven demand this year. The Swiss franc is likely to continue its slow structural appreciation in the years to come, interspersed with bouts of volatility. In the short-term, however, the Swiss National Bank is likely to use the currency to fight deflationary pressures. This suggests the EUR/CHF has upside tactically. Sweden Chart 9Swedish Balance Of Payments The Swedish trade balance has been in structural decline since 2004 and turned negative in 2016. A large component of Swedish exports are machinery and automobiles which have suffered stiff competition from other global giants. The good news is that the weak krona is starting to help. The third-quarter trade balance shifted to a surplus for the first time since 2016 and is currently standing at 0.2% of GDP. Combined with inflows from Sweden’s external investments, this has nudged the current account balance to 3.3% of GDP. Despite net FDI inflows falling to -2.1% of GDP, the basic balance still managed to remain stable at 1.2% of GDP due to the improvement in the current account balance. The recent decline in Swedish FDI has mirrored those in other countries. However, Swedish exports will benefit from a trade détente as well as from a broader improvement in global growth. This should stem FDI outflows. Net portfolio investment in Sweden has been volatile in recent years, but our expectation is for improvement. A weak krona has typically helped the manufacturing sector with a lag of 12 months. Moreover, with the krona trading at a large discount to its long-term fair value, foreign investors will likely benefit from both equity and currency returns, should cyclical stocks continue to outperform defensives. In summary, Sweden’s basic balance should recover to levels that have prevailed over the past few years. Norway Chart 10Norwegian Balance Of Payments The bottom in oil prices since 2016 has gone a long way towards improving Norway’s trade balance. Net trade has fallen marginally this year due to lower exports of oil and natural gas, but still stands at 7.2% of GDP. The trade balance is the primary driver of the current account balance, and the latter now stands at 6.4% of GDP. Norway has seen an exodus of foreign capital from both direct and portfolio investment.  Net FDI and portfolio investment stand at -3% and -4% of GDP, respectively. Declining oil production in the North Sea has been partly responsible for falling FDI. On the portfolio side of the equation, it has been mainly due to increased purchases of foreign equities and bonds, especially via the Oil Fund. Concerns around sustainable investing have also likely diverted investors away from Norwegian assets. Despite this, Norway still sports a basic balance surplus of 3.4% of GDP. Eventually, this basic balance will move from being supported by trade to income inflows from Norway’s large net international investment position. The Norwegian krone is cheap on many metrics, and is one of our favorite petrocurrencies at the moment. Should global growth stabilize, which will revive oil demand, inflows into Norway should improve.   Kelly Zhong Research Analyst kellyz@bcaresearch.com Chester Ntonifor Foreign Exchange Strategist chestern@bcaresearch.com Footnotes Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Limit Orders Closed Trades