[achiever]

USD Swimming in liquidity

With overflowing liquidity, the risk of USD overshooting has increased. The possible passage of US healthcare reform before year-end represents a significant negative event risk for the USD. Sell USD against a basket of EUR and JPY as a less volatile way to position for continued USD weakness into Q4.

Let the tightening begin

In the next three months, G10 central banks are likely to hike for the first time since the crisis began. Bank of England ismost likely to surprise the markets, and this will probably be a significant GBP positive, given the resolutely dovish tone of its recent pronouncements.

EM - The wall of worry meets the wall of money

In EM, investors should position for currency strength in countries where recoveries are well underway and/or are insufficiently discounted by the market.

Twilight of the G3

G3 interest rates as a group are low relative to commodity and EM currencies. One implication is that global investable funds are being driven into relatively small markets. This may be one reason why commodity currencies have done so well, with barely a pullback. It also suggests the possibility that fundamentals will matter less than the price pressures emerging from large sums going into small markets.

Vol - From one extreme to the other

FX volatility has fallen markedly alongside the recovery in global markets. However, in many cases, implied volatility curves are significantly upward sloping, suggesting the market believes that volatility has already bottomed, even though we are just a few months into the recovery. Some argue that this steepness is unlikely to persist.