HSBC - "The USD rally has further to run. The currency war is getting bigger and more intense, drawing ever more protagonists into the fray. In part, this may be because of the success of those central banks who have already sought economic advantage through targeting their currency. The market has realised there is no point in fighting the central banks at this time, and the USD is the natural candidate to act as the offset to this desire for depreciation elsewhere. If anything, the risks…

HSBC - "The fixation on RORO since the financial crisis took hold has, at times, been frustrating given the tendency of the market to flip from risk on to risk off on the latest headline. Nonetheless, it provided a framework for how markets and in particular FX should behave. We knew which currencies to buy when the market was risk on, and which ones to sell. The skill in forecasting or investing was to decide which side of the risk spectrum would dominate, and position…

HSBC - "The lack of a global unifying theme for FX markets is forcing exchange rates into ranges, and away from neat sustainable trends. Markets love a unifying theme on which to build a strategy. Following the break down of the carry model, the risk on-risk off dynamic fulfilled this role, but its grip on the FX market has been on the retreat for a number of months now.

The scramble for a fresh explanation for global market moves is on, but they all fall short because of contradictory…

HSBC - "gold’s recent collapse and generally lower commodity prices have unnerved some investors, and anecdotally we have witnessed some profit-taking in EM currencies, even among some medium-term investors. However, we believe that what we are seeing is likely only to be a pause in risk appetite, and that cheaper levels will be viewed as buying opportunities.

(...) But while we believe many EM currencies will still be sought over the medium term, we still favor being selective within…

HSBC - "The JPY is likely to remain on the defensive for now. In the run-up to the meeting, the market had become wary that the BoJ would under-deliver and USD-JPY had weakened from close to 97 in March to 93. The knee-jerk reaction following the BoJ announcement has reversed much of this move, and it is likely that USD-JPY will continue to trade above 95 in the coming weeks. After all, the proposed pace of QE by the BoJ is roughly USD70bn a month, not far shy of the Fed’s USD85bn QE3…

HSBC - "Dollar Bloc:

CAD headwinds – Recent developments have proven problematic for the CAD, from a more sluggish economy and slippage in some commodity prices, to yet another downscaling of the Bank of Canada’s tightening bias. Moreover, the less favourable shift in the fundamental backdrop suggests less CAD strength than we previously expected, and we have adjusted our forecasts accordingly.

AUD going down under – The AUD has been…

HSBC - "The dollar has risen materially on an index basis since the end of January and is higher against all other G10 currencies. While many would probably dismiss this move as reflecting no more than the effect of the negative stories that have afflicted the euro, the yen and sterling, there is a growing risk that its rally could be extended. A significant surprise in Friday’s payrolls, either positive or negative, could both see the dollar rise.

US activity data have been generating…

You can agree or disagree with their conclusions..., but for me, this is a brilliant piece of analysis... Bravo for HSBC!

Francesc…

HSBC - "The UK has lost its AAA rating for the first time in its history, following the one notch downgrade by Moody's overnight. The implications for GBP are negative, the more pronounced impact likely to be evident when Asian markets reopen on Monday. We have previously highlighted the downgrade danger as one of the factors behind our bearish stance on GBP. We retain our 2013 year-end forecasts of 1.48 on GBP-USD and 0.91 on EUR-GBP.

(...) We started the year as one of the most bearish…

HSBC - "GBP has fallen quite sharply since the beginning of the year, but would seem to have further to go. The currency faces a toxic cocktail of declining fiscal credibility and monetary policy inaction just when market attention is shifting away from the Eurozone crisis and the US fiscal cliff. The fall in GBP so far, although swift, has been relatively modest in historic terms and it remains, if anything, above ‘fair value’ levels. The external accounts are weak and the market is not…

HSBC - "Data is taking centre stage in the FX market as investors seek to understand how far this process of normalisation can go. Under this current period of normalisation, the EUR is benefiting the most but not in the traditional way. The benefit is to do with a reduction in risk and not because the market believes the Eurozone is in the process of a full-blown economic recovery. It is important not to confuse the reduction in binary risk with a return to the traditional pre-crisis world.…

HSBC - "EURCHF has moved off the SNB floor, but further gains will be difficult to sustain. Stabilization in the Eurozone and normalization elsewhere has encouraged CHF sellers back into the market, creating a new environment for EURCHF away from the 1.20 floor. However, it is not clear that this is the start of a sustained rise in the cross. The exchange rate is merely playing catch-up to the earlier reduction in the Eurozone risk premium as reflected in declining periphery spreads. This…

HSBC - "The financial crisis has forced policymakers into some radical choices to underpin the global economy and financial system. Yet now, the market seems to be adopting a different radical notion – that the world is returning to normal and policy with it. FX markets flirt with the idea that the Fed may be ready to turn off the liquidity tap before too long. They ponder life without further monetary easing in the Eurozone or the UK. They look for China’s economic growth to return to the…

HSBC - "USD - USD only expected to gain vs JPY, weaker elsewhere. Short-term direction:  DXY

EUR - Further EUR upside against both USD and GBP. Short-term direction:…

HSBC - Key trade: Buy AUD-JPY
Entry: 94.26 Target: 99.30 Stop: 91.70
We see three factors driving AUD-JPY higher in the short-term
1) A risk-on mood bolstered by dovish Fed speakers
2) AUD upside on the back of stronger than expected China data
3) Ongoing JPY weakness in the run-up to BoJ meeting.

HSBC - "The best and worst of 2013:
G10
Buy EUR-GBP Sell USD-JPY
Asia
Sell MYR-KRW
Sell SGD-THB
Latam
Buy USD-BRL
Sell USD-MXN
EMEA
Sell USD-ZAR
Sell USD-ILS
Technicals
Sell GBP-USD
Buy XAU-JPY"

HSBC - Latam & Asia Currency Recommendations

Currency / Recommendation / End-1Q’13 spot / Risk to forecast

LATAM

ARS: Neutral USD-ARS, 5.22, ARS stronger

BRL: Long USD-BRL, 2.15, BRL stronger

CLP: Long USD-CLP, 500, CLP stronger

COP: Neutral USD-COP, 1,790, COP weaker

MXN: Short USD-MXN, 12.60, MXN stronger

PEN: Short USD-PEN, 2.56, PEN stronger

UYU: Neutral USD-UYU, 20.00, UYU stronger

VEF: Neutral USD-VEF,…

HSBC - "On 16 December, Japan goes to the polls, and the financial markets are convinced that FX is the best way to play the outcome, namely through a lower JPY. This time it’s different, or so the JPY bears would have us believe. After frequent false starts, the recent sell-off in the JPY shows greater conviction. Might the consensus, which for years has mistakenly clamoured for a sliding JPY, finally be correct? We suspect not. The current front runner for the prime minister’s job, Shinzo…

HSBC - "The UK has been AAA since the late 1970s when its longterm debt was first rated. The top-notch rating has survived the ‘winter of discontent’ and industrial strife of 1979, the turmoil of sterling crashing out the Exchange Rate Mechanism in 1992 and, so far, the recent financial crisis.

That could be about to change. With weaker-than expected growth, and still large budget deficits, it is becoming…

HSBC - "The recent rally in USD-JPY has once again come off the back of investors believing “this time is different”. The expectation is the Japanese authorities may actively try to weaken the JPY. We believe that the recent expansion of the BoJ QE programme may actually be JPY positive. More direct and unilateral FX intervention would probably be ineffective in preventing USD-JPY strength in the long term – as it has been over the last 20 years. It also appears very unlikely that the BoJ…