What’s worked in G10 FX this year? – Westpac

Richard Franulovich, Research Analyst at Westpac, suggests that a quick scan of the G10 performance rankings shows that 2016 can be broken down into mainly three simple themes – significant JPY outperformance (USD/JPY down 15% YTD), Brexit driven GBP weakness (GBP/USD down 10%) and decent carry outperformance with AUD and NZD for example showing mid-single digit percentage point gains.

Key Quotes 

“Carry has performed well in 2016 as large swathes of the G10 fixed income markets trade with a negative yield and with risk premia generally subdued. Against that backdrop carry / total yield has outperformed in 2016. But, few seem to have been long carry this year. Summing IMM spec positions in AUD and NZD we find net longs have only been in place for about ½ the year.

Few managers will have captured GBP’s sharp fall this year too. Polls and betting markets showed a clear lean in favour of the “remain” camp and GBP’s sharp 10% fall occurred in barely several hours when the vote count swung decisively toward the “leave” camp. However, a portfolio positioned in line with the momentum of current account balances would have been heavily short GBP.

Few managers will have caught JPY’s solid outperformance this year too, certainly carry has been short JPY and the thrust of monetary policy and the threat of intervention would have seen many shy from owning JPY. The only signal that would have been consistently long JPY this year has been long term PPP valuation. While JPY is close to the OECD and IMF’s PPP estimates it has heavily undervalued on our measure, by 18%, similar to Bloomberg’s estimate.”