For the eighth time, Danske analytics present us their year-end FX Top Trades for the coming year. The global recovery engine is set to turn towards developed markets from emerging markets. This is likely to make carry trades vulnerable, while long FX volatility strategies become right skewed. The Scandi outlook suggests a bullish NOK stance but a more cautious SEK stance.
Inflation is likely to increase in 2017 and monetary policy conditions are set to tighten. Market pricing leaves scope for hawkish CZK surprise. Higher global inflation is likely to support CEE and commodity currencies, while an increase in 10Y UST yields would be JPY negative.
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Danske scores currencies according to current account misalignments, valuation mismatches and net international investment positions. Based on the scorecard, there is upside potential for HUF, CZK, EUR and PLN, while USD and AUD have downside correction potential.
We can’t forget about he Trump presidency. It is likely to have a large impact on FX markets in 2017 via the potential of the Homeland Investment Act 2, positive supply-side policies, higher infrastructure spending and more protectionist policies. The ‘Trump factor’ is set to be negative for JPY and CNY and positive for NOK, RUB and CAD. We also need to consider political instability in Europe. In Danske view, a sharp increase in political uncertainty in Europe would be EUR negative and create demand for traditional ‘safe havens’ such as CHF, JPY and DKK.
This year results