DB FX Daily : Equities and FX and a EUR/SEK opportunity

[RTFX-Trading]

[B]DB FX Daily : Equities and FX and a EUR/SEK opportunity[/B]

FX Daily: London
Equities and FX and a EUR/SEK opportunity
Today's Key Data and Events
GBP Trade balance for June, GPB-6.5bn expected (08:30 GMT)
CAD Housing starts for July, 223.5k expected (12:15 GMT)
CAD New house price index for June, 0.8% mom expected (12:30 GMT)
USD Jobless claims, 310k expected (12:30 GMT)

Upcoming Event Risks
Aug 13 Japan Q2 GDP
Aug 15: Norges Bank rate decision
Aug 23: BoJ rate decision
Aug 31: Jackson Hole Symposium

Correlations between FX and equities
Equity markets have continued to exert a significant influence on currencies in recent days, with signs of stabilization in the S&P seeing a return (of sorts) of risk appetite. Since the dismal close on Friday, the S&P 500 has recovered around 4Ÿ%, while a G-10 carry basket at the NY close was up around 1%. That said, both remain well below their recent peaks and with the negative news flow out of the sub-prime sector unlikely to dry up rapidly we are cautious about calling an end to the current episode. In our view developments in equity markets and the correlations between equities and FX remain key barometers to watch. Either a continued stabilization in equities or a fall in the current high correlations between equity and FX markets would serve as a sign to trade FX as less as a derivative of equity market sentiment - but as yet neither sign has sufficiently materialized.

An opportunity in EUR/SEK
The high correlations between moves in equities and currencies have, in our view, presented some opportunities should the signs of stabilization seen in recent days persist. As our second chart below shows, the expected gap between Eurozone and Swedish interest rates (as expressed in the 3rd Euribor/FRA differential) has been a stronger driver of EUR/SEK. The bout of risk aversion and the associated positioning unwind has seen a relatively large gap open up between the rates spread and the currency pair. A similar picture was seen earlier this year in the February/March carry unwind, with EUR/SEK rallying at that time. Although the gap did not start to close until early April, once it did start to close the move was quite rapid. All up should equities continue to stabilize we would look to be short EUR/SEK targeting a move back to 9.15 (with a concomitant increase in the rates spread also likely).

Adam Boyton
Strategist
(+1) 212 250-8646
[email]adam.boyton@db.com[/email]