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May 31, 2018
Once more, Europe is becoming messy. We did not expect politics to turn so negative this year. The Italians face a difficult task of restoring investor confidence, and Italy is too important to ignore. But European volatility does not translate into US positivity; we believe the underlying dollar outlook remains negative, and the US midterms will add to political noise. Beyond the dollar, volatility breeds opportunity, and we identify numerous trades in currency crosses that should not be sensitive to messy American or European politics. [more]
PROD0000000000469691 1   |    May 31, 2018Thematic Research This is an excerpt of FX Blueprint: Italian Job , published on May 31, 2018. May 31, 2018 FX Blueprint Italian Job Once more, Europe is becoming messy. We did not expect politics to turn so negative this year. The Italians face a difficult task of restoring investor confidence, and Italy is too important to ignore. But European volatility does not translate into US positivity; we believe the underlying dollar outlook remains negative, and the US midterms will add to political noise. Beyond the dollar, volatility breeds opportunity, and we identify numerous trades in currency crosses that should not be sensitive to messy American or European politics. Low conviction in the euro, but dollar not looking great either Italy is too big to fail, the market is still not pricing much Eurozone systemic risk, and the medium-term long position in the euro has not adjusted, suggesting asymmetric downside risks if things get worse. Our baseline assumption is that the Italian political impasse normalizes. With German real yields at record lows, a current account surplus far larger than at the beginning of the crisis, European data surprises at negative extremes, and inflation moving higher, downside in the euro looks limited absent Italian deterioration. In the US, the dollar's medium-term flow picture remains challenging with the basic balance continuing to deteriorate. Cyclically, the increasing maturity of the Fed hiking cycle is the dollar's biggest challenge. When the Fed signaled it had reached neutral rates in 2005-06, the dollar sold off sharply even as yields continued to rise; the risk is that we see this again. Yeny reasons to be bullish US rates are an asymmetric yen driver with higher yields driving risk-aversion and lower rates dragging on the cross. The market has almost fully priced out any policy change from the BoJ even though wages have started to rise and financial stability considerations are pushing the other way. Still, politics remains asymmetric with further negative newsflow on Abe putting his September re- election at risk and likely seeing a challenge to Abenomics. Bullish Britain and having another go at the krona We retain our constructive view on the pound, as we see upside risk with regards to Brexit and the Bank of England. We see near-term downside risk to CHF in a European context; the cross has lost its support from bund yields, Swiss outflows are unlikely given Italian uncertainty, the mispricing between Authors www.dbresearch.com George Saravelos +44(20)754-79118 george.saravelos@db.com Robin Winkler +44(20)754-71841 robin.winkler@db.com Oliver Harvey +44(20)754-51947 oliver.harvey@db.com Deutsche Bank Research FX Blueprint 2   |    May 31, 2018Thematic Research © Copyright 2018. Deutsche Bank AG, Deutsche Bank Research, 60262 Frankfurt am Main, Germany. All rights reserved. When quoting please cite “Deutsche Bank Research”. The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the author, which do not necessarily correspond to the opinions of Deutsche Bank AG or its affiliates. Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by Deutsche Bank. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. No warranty or representation is made as to the correctness, completeness and accuracy of the information given or the assessments made. In Germany this information is approved and/or communicated by Deutsche Bank AG Frankfurt, licensed to carry on banking business and to provide financial services under the supervision of the European Central Bank (ECB) and the German Federal Financial Supervisory Authority (BaFin). In the United Kingdom this information is approved and/or communicated by Deutsche Bank AG, London Branch, a member of the London Stock Exchange, authorized by UK’s Prudential Regulation Authority (PRA) and subject to limited regulation by the UK’s Financial Conduct Authority (FCA) (under number 150018) and by the PRA. This ECB and SNB has now been corrected and net positioning remains stubbornly short in CHF. Across the North Sea, we prefer the Swedish Krona to its Norwegian counterpart. It's all relative down under The key aspects of the global backdrop - metal prices and EM earnings revisions - look stable enough for some near-term upside in the AUD. On the kiwi side, both consumer and business signals point to downside risk. Meanwhile, the outlook isn't healthy for the Canadian dollar, inhibited by the domestic housing market, lethargic investment, and oil prices. Asia a mixed bag Taiwan FX looks overvalued with a deteriorating flow picture driven by equity outflows and active lifer recycling. Chinese inflows, in contrast, appear set to continue on anticipation of further inclusion in global equity and bond indices. Elsewhere in Asia, IDR looks cheap on our models, unlike the Indian rupee; we see IDR as better placed to weather any storms related to oil prices, and a better defensive play in general. Value opportunities in EMEA With the zloty hitting both valuation and macro sweet spots, PLN looks cheap on our valuation models, while robust growth and increasingly reduced macro vulnerability are further reasons to be bullish. We believe Russia is also an attractive retracement trade with the ruble standing out positively on valuations and macro. Bullish Argentina and Colombia LatAm faces material political headwinds in coming months. We expect the political outlook in Brazil to get worse before it gets better. Similarly, we believe a poor election outcome is not fully priced in Mexico. In contrast, we are more positive in Argentina and Colombia on a more favorable policy mix and favorable carry. For important disclosure information please see: https://research.db.com/ Research/Disclosures/Disclaimer Deutsche Bank Research FX Blueprint 3   |    May 31, 2018Thematic Research information is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. and in Singapore by Deutsche Bank AG, Singapore Branch. In Japan this information is approved and/or distributed by Deutsche Securities Inc. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product.
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