MUFG Research Report A4 Template

1 FX Weekly │ 19 November 2021

FX Weekly

19 November 2021

All signs point to further USD strength

FX View: The reality that COVID is set to play a disruptive role in economic activity

across Europe, and possibly beyond, through this winter is hitting non-dollar

currencies. The euro is taking the lead lower but increased global growth

uncertainties will be to the benefit of the dollar broadly. This is especially so when the

Fed is slowly shifting its communication and signalling a greater willingness for rate

hikes in 2022 and a possible faster taper. We see scope for the US yield curve to drift

further higher, adding support to the dollar. We also focus on CHF this week with

EUR/CHF breaking below 1.0500 for the first time since 2015.

Trade Ideas: We are recommending a new long USD/CZK trade idea to reflect

building fears over downside risks to growth in Europe heading into year end. We have closed our short EUR/USD and short GBP/CHF trade ideas.

Yen Flows: This week we cover the MoF Balance of Payments data which revealed

a worsening of Japan’s trade position given auto-sector weakness on the export side and higher energy on the import side. Flows saw increased demand for US fixed income after a long period of subdued buying.

G10 Rates – What’s priced?: The European rate market has been scaling back

ECB rate hike expectations. A rate hike as soon as next year is now priced as much

less likely. A development that will please the ECB who have been actively pushing

back against those expectations.

FX Correlations: TRY correlations with other high yielding EM FX have been weak

over the past month. There has been little correlation with USD/MXN and USD/RUB. The correlation with USD/ZAR has been stronger. USD/CLP has had by far the strongest correlation to USD/CLP although there is no strong fundamental link.

GBP MATCHES USD STRONG PERFORMANCE THIS WEEK

Source: Bloomberg, 11:10 GMT, 19th November 2021 (Weekly % Change vs. USD)

-2.5%

-2.1%

-1.3%

-1.3%

-0.8%

-0.6%

-0.6%

-0.1%

0.1%

-3.0% -2.5% -2.0% -1.5% -1.0% -0.5% 0.0% 0.5%

NOK

SEK

AUD

EUR

CAD

NZD

CHF

JPY

GBP

FX Weekly

DEREK HALPENNY Head of Research

Global Markets EMEA & International Securities

Global Markets Research Global Markets Division for EMEA

T: +44 (0)20 7577 1887 [email protected]

E:

LEE HARDMAN Currency Analyst

Global Markets Research Global Markets Division for EMEA T: +44 (0)20 7577 1968 E: [email protected]

MUFG Bank, Ltd. A member of MUFG, a global financial group

mailto:[email protected]



FX Views

EUR: Downside move might have further to run

Our short EUR/USD trade idea that has been running over the past few weeks hit its

profit target of 1.1300 this week and while the scale of the move lower in such a short

period of time suggests caution, there remain factors that could encourage further

declines going forward. Our FX forecasts have shown EUR as the laggard over the

forecast horizon given the scope for the ECB to remain well behind most other G10

central banks in hiking rates. In October, there was a notable shift in rate

expectations higher that dragged even EUR rates higher. The 3-year forward OIS for

EUR turned positive in October but economic developments in the euro-zone lately

and ECB communications have driven rates back into negative territory.

The economic risks have certainly deteriorated and while those risks may be better

priced now, things can still get worse. Austria today announced a full lockdown with

covid risks elevated across numerous euro-zone countries. The shifting economic

risk profile could quickly change what markets expect from the ECB at its December

policy meeting. Suddenly, the ECB may have strong justification for maintaining a

more dovish stance through a larger or longer APP program. Developments in the

coming days will be key. Secondly, we have the minutes from the last FOMC meeting

next week. Recent rhetoric suggests a growing chorus for a more aggressive shift in

policy stance. Currently the Dec 2022 fed funds future implies a policy rate of 0.62%.

If the markets really start to believe in a faster taper, the scope for three rate hikes

next year will start to be priced – implying scope for a further 20bps or so to be priced

into the front end. Thirdly, we see growing risks of an FX adjustment in China. The

CFETS RMB index is close to levels last seen in 2015 and is over 10% stronger

since mid-2020. But the economy will continue to slow resulting in more liquidity type

easing that may well prompt a CNY drop – a development that would likely weigh on

EUR/USD. Finally, the SNB could soon need to act to slow EUR/CHF declines. If

SNB intervention does pick up, rebalancing flows out of EUR into USD means the

SNB can become a more active EUR/USD seller.

The September BoP data released today from the ECB highlighted negative portfolio

flows at that point. Euro-zone investors bought EUR 27.7bn worth of foreign long-

term debt securities and foreign investors sold EUR 30.8bn. With global yields set to

rise notably further relative to the euro-zone this is a factor that could further weigh

on EUR performance over the coming months.

While we have already seen a sharp drop in EUR/USD, there remains scope for this

to continue over the short-term at least.

EUR stands out

Factors that could see EUR/USD

extend further lower

Yield disadvantage on show earlier

flows to September in ECB data

Key FX take away: EUR downside

momentum to persist

EUR/USD & 2YR SPREAD PLUS 20BPS WIDENING FOREIGN INVESTORS SELLING EZ DEBT

Source: Macrobond; Bloomberg Source: Macrobond & Bloomberg


CHF: How much stronger can we go?

The Swiss franc has continued to perform well and is in focus today after EUR/CHF

broke notably below the 1.0500 level for the first time since July 2015 – not even

through the worst point of turmoil last year did EUR/CHF break the 1.0500 level. So

this is significant and highlights underlying and persistent CHF strength. This strength

in 2021 has been since March. The rise in global yields in Q1 helped fuel CHF selling

but since the narrative changed to focusing on inflation concerns and supply

constraint issues, CHF has trended stronger versus EUR. Since the start of Q2

(when inflation fears escalated globally) CHF is the top performer in G10 FX. It

suggests increased demand due to market participants viewing CHF as a safe

destination to shelter from inflation risks. Does this view stack up?

In our opinion this is more about a belief that in this environment of elevated inflation

risks, the behaviour of the SNB will change. After all, surely Japan is a safe haven to

protect against inflation also. But of course the yen has floated freely largely for a

number of years now. But the SNB has had a persistent policy of fighting CHF

strength. Indeed, through COVID, while EUR/CHF didn’t breach 1.0500, it was very

much with the help of CHF selling by the SNB. Sight deposit data shows an CHF

80bn increase from the start of March to mid-April last year, implying aggressive

intervention. And prior from when the EUR/CHF floor was abandoned in Jan 2015,

sight deposits jumped CHF 200bn through to May 2017. So a shift in SNB behaviour

now would be a big deal and open up the potential for an FX re-adjustment after

years of manipulation. Two other possibly linked factors are worth a mention.

Switzerland’s current account surplus is trending lower, from 8% when the EUR/CHF

floor was abandoned to around 3% now. The BIS CHF REER is now roughly at the

same level as 10yrs ago suggesting arguments from the SNB of CHF overvaluation

are no longer valid. This may be playing out in discussion between the US and

Switzerland with the US Treasury in “enhanced engagement” in relation to the threat

of being cited as a “currency manipulator”. The US Treasury FX report is due soon.

Sight deposits have picked up a little lately but the muted increase at this key FX

level does suggest a more benign SNB response. We believe that is going to

encourage the markets to test the resolve of the SNB and we see near-term CHF

upside risks. IMM data suggests large short CHF leveraged positions – which could

mean CHF shorts are in the market in anticipation of SNB action. We may see a CHF

surge initially as these positions are squeezed from the market. We see growing risks

of a notable jump in CHF implied volatility at the short-end.

While global inflation may ease SNB concerns and offer the prospect of a less active

fight against CHF appreciation, we suspect at some point the markets may force the

hand of the SNB to intervene and limit CHF strength from a move beyond parity.

CHF top performer since inflation fears

escalated

Is the SNB shifting its stance?

A break of 1.0500 could spark a flurry

of buying and a surge stronger

Key FX take away: SNB could be

forced to act even under the eye of the

US

EUR/CHF & CHANGE IN SIGHT DEPOSITS CHF REER AT SIMILAR RATE TO 10YRS AGO

Source: Bloomberg, Macrobond & MUFG GMR Source: Bloomberg, Macrobond & MUFG GMR


NZD & SEK: Leaders & laggards in G10 policy tightening race

The SEK has continued to underperform over the past week alongside the other G10

European currencies of the NOK, EUR and CHF. It has extended this month’s sell off

for the SEK during which it has declined by around -3.9% vs. USD and -1.7% vs.

EUR. It has been a sharp reversal lower for the SEK after EUR/SEK attempted and

failed to sustain a break below the 10.000-level earlier this month. It has brought the

pair back towards the average so far this year of around 10.1300. Investor sentiment

towards European currencies has become more bearish reflecting building concerns

over more acute downside risks to growth in the region from: i) the latest COVID

wave, ii) the energy price shock, iii) risks to external demand from the real estate

slowdown in China and unfolding currency crisis in Turkey and iv) renewed

geopolitical risks with Russia.

At the same time, the ECB and Riksbank are both expected to be laggards in the

G10 monetary tightening cycle going forward. The Riksbank will deliver their latest

policy update in the week ahead. We expect the Riksbank to follow other central

banks by delivering a more hawkish policy signal but the planned pace of tightening

should remain relatively slow. The Riksbank’s updated forecast profile for the policy

rate is likely to show a rate hike for the first time in 2024. A small hawkish step but

still much less hawkish than current market expectations for multiple hikes as soon

as next year. We expect the Riksbank to begin raising rates in 2023, and policy

tightening next year is more likely to focus on shrinking their balance sheet. It should

lead to greater policy divergence with the ECB placing modest downward pressure

on EUR/SEK in the year ahead, although SEK should underperform more broadly.

At the other end of the spectrum, the RBNZ is leading the race to tighten policy. The

NZD has outperformed over the past month encouraged by the market expectations

for aggressive RBNZ rate hikes. The New Zealand rate market has priced in almost

another 125bps of hikes by the end of next year since early in October and lifting the

policy rate up towards 2.50%. It would take policy settings into restrictive territory

based on the RBNZ’s estimate of the neutral rate at around 2.00%. A lot of tightening

is now priced in which dampens further upside potential for domestic rates and NZD

going forward. The RBNZ would have to significantly speed up rate hike plans by

delivering a larger 0.50 point hike to trigger a much stronger NZD. We expect the

RBNZ’s rate hike profile to move more in line with current market expectations

showing the neutral policy rate being achieved next year.

In these circumstances, fundamental drivers continue to favour the NZD over the

SEK. A bigger RBNZ hike though will likely be required to trigger further NZD gains in

the near-term. The recent SEK sell off is also starting to look overdone. We expect

gradual SEK gains to resume against the EUR in the year ahead.

SEK has underperformed this month

alongside other European currencies

as downside risks to growth in Europe

have come into more focus.

Riksbank to take another small step to

tighten policy but planned pace of

tightening to remain slow. Policy

divergence favours SEK over EUR.

RBNZ set to continue leading way in

normalizing policy. A lot is already

priced in now so RBNZ would have to

deliver bigger hike to trigger much

stronger NZD.

Key FX take away: Fundamentals

continue to favour NZD over SEK.

Amongst laggards we prefer SEK over

EUR.

NZD & SEK PERFORMANCE HAS DIVERGED POLICY DIVERGENCE FAVOURS SEK OVER EUR

Source: Bloomberg, Macrobond & MUFG GMR

Source: Bloomberg, Macrobond & MUFG GMR


Weekly Calendar

Ccy Day GMT Indicator/Event Period Consensus Previous Mkt Moving

USD 11/22/2021 15:00 Existing Home Sales Oct 6.20m 6.29m !

NZD 11/22/2021 21:45 Retail Sales Ex Inflation QoQ 3Q -- 3.3% !!

EUR 11/23/2021 09:00 Markit Eurozone Manufacturing PMI Nov P -- 58.3 !!!

EUR 11/23/2021 09:00 Markit Eurozone Services PMI Nov P -- 54.6 !!!

GBP 11/23/2021 09:30 Markit UK PMI Manufacturing SA Nov P -- 57.8 !!!

GBP 11/23/2021 09:30 Markit/CIPS UK Services PMI Nov P -- 59.1 !!!

GBP 11/23/2021 11:00 BoE's Haskel speaks !!!

USD 11/23/2021 14:45 Markit US Manufacturing PMI Nov P -- 58.4 !!

USD 11/23/2021 14:45 Markit US Services PMI Nov P -- 58.7 !!

NZD 11/24/2021 01:00 RBNZ Official Cash Rate 0.75% 0.50% !!!

EUR 11/24/2021 09:00 German IFO Business Climate Nov -- 97.7 !!

USD 11/24/2021 13:30 Initial Jobless Claims -- -- !!

USD 11/24/2021 13:30 Advance Goods Trade Balance Oct -$93.5b -$96.3b !!

USD 11/24/2021 13:30 GDP Annualized QoQ 3Q S 2.2% 2.0% !!

USD 11/24/2021 13:30 Durable Goods Orders Oct P 0.2% -0.3% !!

USD 11/24/2021 15:00 Personal Spending Oct 0.8% 0.6% !!

USD 11/24/2021 15:00 PCE Core Deflator YoY Oct 4.1% 3.6% !!!

USD 11/24/2021 15:00 U. of Mich. Sentiment Nov F 66.8 66.8 !!

USD 11/24/2021 15:00 New Home Sales Oct 808k 800k !!

USD 11/24/2021 19:00 FOMC Meeting Minutes -- -- !!!

AUD 11/25/2021 00:30 Private Capital Expenditure 3Q -2.6% 4.4% !!

EUR 11/25/2021 07:00 German GDP SA QoQ 3Q F -- 1.8% !!

NOK 11/25/2021 07:00 Unemployment Rate AKU Sep -- 4.0% !!

EUR 11/25/2021 08:00 ECB's Villeroy speaks !!

SEK 11/25/2021 08:30 Riksbank Interest Rate -- 0.0% !!!

GBP 11/25/2021 17:00 BoE Governor Bailey speaks !!!

AUD 11/26/2021 00:30 Retail Sales MoM Oct 2.7% 1.3% !!

CHF 11/26/2021 08:00 GDP QoQ 3Q -- 1.8% !!

SEK 11/26/2021 08:30 Retail Sales MoM Oct -- -0.3% !!

EUR 11/26/2021 09:00 M3 Money Supply YoY Oct -- 7.4% !!

Source: Bloomberg & MUFG GMR

Key Events:

President Biden is expected to announce his pick for Fed Chair. The release of the latest FOMC minutes will also attract market attention in the week ahead. The Fed outlined their plans to begin tapering QE. The QE tapering process is set to come to an end in June 2022. However, there is already building speculation that the Fed could speed up the pace of tapering early next year in response to upside inflation risks. The minutes will be scrutinized closely to see if the Fed discussed setting a faster initial pace of taper. The Fed also gave little away in terms of fresh policy signals over the potential timing of the first rate hikes at the November FOMC meeting. The accompanying minutes could shed more light on any rate hike discussions.

The RBNZ are expected to deliver their second consecutive rate hike in the week ahead. Economic developments since the RBNZ’s last policy meeting have increased the risk of the RBNZ delivering a larger 0.50 point hike in an attempt to put a dampener on rising inflation expectations. Over the past month, headline inflation jumped sharply to 4.9% in Q3 and the unemployment rate dropped to the lowest level since prior to the GFC. The RBNZ has already signalled that it wants lift the policy rate towards their estimate for the neutral policy rate of about 2%. The RBNZ updated OCR forecast profile is likely to show that level being reached sooner than in 2H 2023 as projected back in August.

The Riksbank are expected to lag behind when rising rates. We expect the Riksbank to leave rates unchanged this week but the update rate projections are likely to start forecasting in hikes from 2024 for the first time. As a first step to tightening policy, the Riksbank has been signaling that it seriously considering reducing the size of their balance sheet from next year rather than keeping it steady as currently planned. Market participants will be watching for any update on balance sheet plans as well.


FX Impact from Key Economic Data Releases & Events

Historical FX performance following key economic data releases and events. Economic surprise is

calculated as: [Actual value of Release – Median Forecast from Bloomberg Survey]/ Standard

Deviation of Forecasts from Bloomberg survey.

RBNZ POLICY MEETING – 60 MINS IMPACT ON NZD

AVERAGE VS. LOWER & UPPER BOUND RESPONSES

RIKSBANK POLICY MEETING – 60 MINS IMPACT ON SEK

AVERAGE VS. LOWER & UPPER BOUND RESPONSES

Source: Bloomberg & MUFG GMR

Key Takeaways:

The NZD has reacted strongly initially following RBNZ policy meeting over the past year. The NZD weakened initially following the last two RBNZ policy meetings even when they started to raise rates in October. There was some disappointment that the RBNZ did not raise rates by 0.50 point rather than by 0.25 point. A similar set up is again in play ahead of the upcoming policy meeting.

In contrast, the Riksbank’s policy meetings so far this year have had a more modest impact on the SEK. There is a clearer trend for the SEK to soften modestly perhaps reflecting some initial disappointment that the Riksbank has not shifted in more hawkish policy direction. There is a higher likelihood of hawkish policy signal in the week ahead which could encourage a stronger SEK. The Riksbank could start to signal a rate hike for the first time later in their forecast profile and/or signal plans to begin shrinking their balance sheet next year.

Release Date Time Actual Surprise % Change in NZD/USD

06/10/2021 02:00 0.50% 0.00 -0.255%

18/08/2021 03:00 0.25% -2.50 -0.323%

14/07/2021 03:00 0.25% - 0.573%

26/05/2021 03:00 0.25% - 0.723%

14/04/2021 03:00 0.25% - 0.321%

24/02/2021 03:00 0.25% - 0.274%


New Trade Ideas

LONG USD/CZK – OPENED @ 22.450, TARGET @ 23.250 & S/L @ 22.000)

We are recommending a long USD/CZK trade idea. This trade idea should benefit

from building investor pessimism towards Europe in the near-term. The risk of

further COVID disruption in the region is increasing over the winter. New COVID

cases are close to record highs in the Czech Republic. At the same time, Central

European currencies including the CZK are vulnerable to downside risks from

heightened geopolitical risks between the EU and Russia. The emerging currency

crisis in Turkey could also start to have more of a negative spill over impact on

EM currencies more broadly in EMEA. In contrast, the USD is well positioned to

strengthen further in the near-term as the Fed is becoming more hawkish and the

US economy has bounced back in Q4 following the slowdown in Q3. The main

risk would be if President Biden chooses Governor Brainard to be the next Fed

Chair which could trigger a temporary sell off for the USD. Unlike USD/HUF and

USD/PLN, USD/CZK is still trading well below the highs from last year leaving it

more sensitive to a broader correction lower for European currencies.

Downside risks are building for the

CZK that is still trading at stronger

levels


Closed Trade Ideas

SHORT EUR/USD – CLOSED @ 1.1300 (OPENED @ 1.1650, TARGET @ 1.1300 &

S/L @ 1.1850)

We have closed our short EUR/USD trade idea after the profit target was hit at

the 1.1300-level. The trade idea has benefited both from market expectations for

more active Fed tightening in the coming years in response to building upside

risks to the US inflation outlook. At the same the latest activity data has revealed

that the US economy has picked up after the slowdown in Q3 helped by less

COVID-related disruption. In contrast, the European rate market has called back

ECB rate hike expectations. The ECB has been pushing back against market

expectations for rate hikes as soon as next year. The ECB has been helped by

building fears over downside risks to growth in the euro-zone heading into year

end. Those fears have been heightened over the past week by the tightening of

COVID-related restrictions in response to the latest COVID wave in Europe.

Geopolitical tensions with Russia and the emerging currency crisis in Turkey have

also come into greater focus as potential downside risks for the EUR. We believe

risks remain tilted to the downside for EUR/USD but the EUR is now more deeply

undervalued which makes the risk/reward balance less attractive for shorts.

SHORT GBP/CHF – CLOSED @ 1.2550 (OPENED @ 1.2350, TARGET @ 1.1900 &

S/L @ 1.2550)

We have closed our short GBP/CHF trade idea after it hit our S/L at 1.2550. In

hindsight the S/L was probably set too tight. The trade idea was proven poorly

timed as the GBP has rebounded over the past week supported in part by

building confidence that the BoE will begin to raise rates next month. It follows the

release of stronger UK labour market and CPI reports for October. It has provided

further reassurance that unemployment is likely to rise only modestly after the

jobs furlough scheme ended in September. However, it does not change our view

that the pace of BoE rate hikes will be only gradual. We are not convinced that

the GBP will strengthen on the back of gradual hikes when inflation is so elevated

and there is risk that inflation expectations continue to rise keeping downward

pressure on UK real yields. The GBP has also benefitted in part from the recent

change in tone from UK officials in negotiations with the EU over the Northern

Ireland protocol. Recent comments have helped to reduce the risk of the UK

government triggering Article 16 before the end of this year and potentially bring

No Deal Brexit risks back in the market’s focus. Nevertheless, we still favour the

CHF to keep trending stronger against the GBP despite the recent setback.

EUR/CHF has just broken below support at 1.0500 and it remains in demand as a

hedge against inflation and risks to growth in Europe.

EUR/USD hit by double whammy of

stronger USD and weaker EUR

GBP stages rebound but we are not

convinced it will last


FX Portfolio

Trade idea Notional Entry Date Entry Level

Current S/L Target Spot P&L Carry P&L

Portfolio Contribution

Closed Trades

Short EUR/JPY USD5mn 15/01/2021 125.70 126.80 127.30 123.00 -43,755 942 -42,813

Short USD/TRY USD5mn 22/01/2021 7.4000 7.0500 7.6500 7.0500 236,486 25,373 261,859

Short EUR/CZK USD5mn 29/01/2021 26.050 25.855 26.300 25.500 37,428 1,407 38,835

Long GBP/USD USD5mn 29/01/2021 1.3725 1.4100 1.4100 1.4250 136,612 271 136,883

Short EUR/NOK USD5mn 05/02/2021 10.300 10.348 10.550 9.9500 -23,495 1,713 -21,783

Long AUD/USD USD5mn 19/02/2021 0.7840 0.7830 0.7700 0.8120 -6,378 163 -6,214

Short EUR/CAD USD5mn 05/03/2021 1.5110 1.4844 1.5400 1.600 88,021 1,013 89,034

Long TRY/RUB USD5mn 19/03/2021 10.200 9.5500 9.9000 10.800 -305,543 29,075 -276,468

Short EUR/USD USD5mn 12/03/2021 1.1935 1.1870 1.2080 1.1700 27,231 3,575 30,806

Long GBP/SEK USD5mn 26/03/2021 11.900 11.650 11.650 12.350 -105,042 190 -104,852

Short USD/RUB USD5mn 07/05/2021 73.770 73.823 75.250 71.000 8,796 5,007 13,802

Short USD/CZK USD5mn 16/04/2021 21.620 20.850 21.350 20.850 178,076 2,463 180,538

Long AUD/USD USD5mn 09/04/2021 0.7620 0.7719 0.7670 0.7895 63,962 846 64,808

Long NZD/SEK USD5mn 28/05/2021 6.0300 5.9493 5.9000 6.2500 -66,915 576 -66,339

Long GBP/USD USD5mn 04/06/2021 1.4175 1.3950 1.3950 1.4585 -79,365 -59 -79,424

Long RUB/JPY USD5mn 21/05/2021 1.4830 1.5241 1.4930 1.5730 138,570 14,059 152,629

Long NZD/USD USD5mn 25/06/2021 0.7086 0.6930 0.6930 0.7400 -110,076 226 -109,850

Short USD/ZAR USD5mn 02/07/2021 14.360 14.400 14.860 13.860 -13,928 12,883 -1,045

Short GBP/NOK USD5mn 09/07/2021 12.060 12.160 12.300 11.700 -41,459 169 -41,290

Short EUR/GBP USD5mn 30/07/2021 0.8520 0.8578 0.8670 0.8350 -34,102 3,031 -31,071

Long USD/JPY USD5mn 13/08/2021 110.25 109.92 108.75 112.50 -15,208 777 -14,431

Short AUD/NZD USD5mn 23/07/2021 1.0565 1.0325 1.0750 1.0250 125,414 1,514 126,929

Short EUR/RUB USD5mn 10/09/2021 86.150 83.000 88.000 83.000 182,821 29,341 212,161

Short GBP/USD USD5mn 24/09/2021 1.3690 1.3756 1.3950 1.3200 -24,361 148 -24,213

Long CAD/AUD USD5mn 08/10/2021 1.0930 1.0921 1.0700 1.1300 -4,133 569 -3,564

Short EUR/USD USD5mn 29/10/2021 1.1650 1.1300 1.1850 1.1300 150,215 1,442 151,657

Short GBP/CHF USD5mn 05/11/2021 1.2350 1.2550 1.2550 1.1900 -80,972 781 -80,191

Open Trades

New Trades

Long USD/CZK USD5mn 19/11/2021 22.450 22.000 23.250

Source: MUFG GMR; Changes in stops/targets in bold italics. (1) Current levels reflect intraday pricing. (2) The portfolio represents hypothetical, not actual, investments.

Furthermore, we do not actively manage these hypothetical positions on a daily basis and changes tend to be made only through this publication on a weekly basis. To reflect the

level of conviction of our trades we run trades in two different amounts: High conviction trades = USD 10mn & Basic conviction trades = USD 5mn


JPY Flows – Balance of Payments

Key Takeaways:

MoF Balance of Payments data for September, released earlier this month, confirmed what we have been highlighting. The Supply constraint issues coupled with rising energy prices is undermining Japan’s trade balance (Chart 1). The September trade balance was a deficit of JPY 230bn, the second consecutive month of deficit – the first time that has happened since the initial fallout from the pandemic last year. 20% of Japan’s export total is related to autos while around 20% of Japan’s import bill is related to fossil fuels. So Japan’s trade balance has been hit from both sides and this has helped reinforce JPY depreciation.

Chart 2 highlights the fact that Japan’s FDI outflows are not being hit notably from the increased uncertainties related to supply constraints and inflation. The 3mth net FDI outflow totalled JPY 3.45trn in September, 50% higher than in September 2020. However, compared to 2019, the net FDI flow was 17% smaller. So COVID perhaps when measured to pre-COVID times is still having an impact, although less than the worst initial period last year.

On the financial account side of the BoP data, the portfolio flows revealed a sharp rebound in foreign bond purchases with much of the rebound destined for US bond markets. Japan investors bought JPY 3.89trn worth of US bonds in September following a long period of subdued buying. Over the previous 4mths, Japan investors had bought just JPY 150bn worth of US bonds.

In Europe Japan investors were buyers of bonds in all four countries highlighted in Chart 4. As is often the case, France saw the biggest flow with Japan investors viewing France as Germany plus some modest yield enhancement.

Chart 5 and 6 confirms that weak demand in the UK and Australia continued. Yields in Australia in September were considerably lower than today (10yr avg 1.30% in Sept; 1.80% today) so we’d expect flows to pick up in Q4. It’s a similar story for the UK with yields higher today.

Source: Macrobond, Bloomberg, MUFG GMR


FX Positioning

The Commodity Futures Trading Commission (CFTC) publish weekly reports revealing positioning for the following currencies:

AUD, BRL, CAD, CHF, EUR, GBP, JPY, MXN, NZD, RUB, USD (implied) and ZAR. We have applied z-scores to the

positioning data to provide a signal of how stretched current positions are compared to averages over the last two years.

BREAKDOWN BY INVESTORS

REDUCTION IN USD LONGS BUT STILL ELEVATED JPY SHORTS HAVE BECOME MORE EXTREME

Source: Bloomberg, CFTC, Macrobond & MUFG GMR (as of 9th

November 2021)

Key Takeaways:

The latest IMM report revealed that Leveraged Funds cut back long USD positions in the week ending 9th November. It was the first

reduction in long USD positions since the middle of September. The USD has since strengthened sharply following the release of

the US CPI report for October. It is likely that long USD positions have been rebuilt in response.

Long USD positions have been mainly built up against the AUD, EUR and JPY. In contrast Leveraged Funds continue to hold short

USD positions against the GBP, MXN NZD and ZAR.

In the latest weekly data, there was a notable reduction in short AUD positions and long GBP positions held by Leveraged Funds.

Looking at positions held by Leveraged Funds over the last couple of years, our z-score analysis signals that short CHF and JPY

positions have become more extreme of late. Short JPY positions continued to increase in the latest weekly data even as long USD

positions were reduced more broadly.

No. of contracts Z-Score No. of contracts Z-Score No. of contracts Z-Score

AUD -33,141 -0.61 AUD -24,751 -1.58 AUD -57,892 -1.25

BRL -14,183 -0.23 BRL -1,199 0.08 BRL -15,382 -0.18

CAD 43,812 0.96 CAD -12,977 -0.30 CAD 30,835 0.41

CHF -7,555 -0.45 CHF -11,165 -3.10 CHF -18,720 -2.06

EUR 235,272 -0.83 EUR -35,132 -0.19 EUR 200,140 -0.58

GBP -40,629 -1.80 GBP 6,447 -0.14 GBP -34,182 -1.36

JPY -42,309 -1.34 JPY -71,946 -2.64 JPY -114,255 -1.84

MXN 61,631 -0.34 MXN 23,274 -0.11 MXN 84,905 -0.28

NZD 2,762 0.37 NZD 12,489 1.86 NZD 15,251 1.26

RUB 39,382 1.39 RUB -8,437 -0.88 RUB 30,945 0.92

USD -243,489 1.15 USD 122,211 1.75 USD -121,278 1.49

ZAR -1,553 -0.97 ZAR 1,186 1.16 ZAR -367 -0.15

Asset Manager/Institutional Leveraged Funds Asset Manager/ Insitutional &

Leveraged Funds


G10 Rates – What’s priced?

In this section, we will assess how market expectations for G10 central bank rates are evolving. We have utilized Bloomberg’s

MIPR <GO> function to track market implied policy rates. The tables and charts below provide an indication of current market

pricing and how those expectations have changed recently.

CURRENT MARKET PRICING

RECENT CHANGES IN MARKET PRICING

Source: Bloomberg & MUFG GMR (as of 17th

November 2021)

Key Takeaways:

It has largely been period of consolidation for G10 rate hike expectations over the past week. The biggest change in rate hike

expectations has been for the RBNZ. The New Zealand rate market has continued to price in more hikes into the coming years. The

pace of rate hikes are expected to be more front loaded with just over 100bps of hikes expected over the next six months and the

policy rate rising to just over 3.00% over the next two years.

US rate market is continuing to price in a more active Fed after the stronger US CPI report for October. The Fed is expected to

deliver around 50bps of hikes by the end of next year, and almost a further 75bps of hikes by the end of 2023.

The stronger UK CPI report for October and reassuring labour market report have supported market expectations for the BoE to

begin raising rates in December. UK rate expectations are little changed though over the past week with market participants still

expecting around 100bps of hikes by the end of next year. The market is split on the timing of the second follow up 0.25 point hike

in either Q1 or Q2 of next year.

The European rate market has been scaling back ECB rate hike expectations. A rate hike as soon as next year is now priced as

much less likely. A development that will please the ECB who have been actively pushing back against those expectations.

Current Rate Next Policy Meeting

3M 6M 1Y 2Y 3Y 3M 6M 1Y 2Y 3Y

US 0.13% 0.13% 0.21% 0.58% 1.33% 1.52% 1 8 45 121 139 15/12/2021

Euro-zone -0.50% -0.50% -0.49% -0.44% -0.18% -0.09% 0 1 6 32 41 16/12/2021

UK 0.10% 0.39% 0.68% 1.16% 1.33% 1.21% 29 58 106 123 111 16/12/2021

Japan -0.03% -0.04% -0.04% -0.03% -0.02% -0.02% -1 -1 -1 1 1 17/12/2021

Canada 0.25% 0.45% 0.84% 1.41% 1.96% 2.09% 20 59 116 171 184 08/12/2021

Australia 0.10% 0.12% 0.20% 0.83% 1.80% 1.93% 2 10 73 170 183 07/12/2021

New Zealand 0.50% 1.03% 1.58% 2.45% 3.12% 2.72% 53 108 195 262 222 24/11/2021

Norway 0.25% 0.56% 0.76% 1.22% 1.43% 1.41% 31 51 97 118 116 16/12/2021

Sweden 0.00% 0.13% 0.27% 0.44% 0.89% 1.02% 13 27 44 89 102 25/11/2021

Switzerland -0.75% -0.73% -0.68% -0.54% -0.16% -0.05% 2 7 21 59 70 16/12/2021

Implied Policy Rate Expected Policy Rate Change (bps)

3M 6M 1Y 2Y 3Y 3M 6M 1Y 2Y 3Y

US 1 5 15 38 1 2 9 41 75 58

Euro-zone -1 -11 -6 13 -26 0 2 7 31 35

UK -14 -15 -1 10 10 28 51 81 81 61

Japan -1 -1 0 0 -1 -1 1 3 6 7

Canada 19 37 33 35 26 20 54 85 87 74

Australia 0 2 34 60 33 3 9 66 125 114

New Zealand 27 29 46 63 31 49 90 125 166 101

Norway 3 3 6 -7 -11 24 29 48 35 27

Sweden 7 9 17 23 13 18 25 35 67 66

Switzerland 1 0 2 4 2 5 5 18 43 43

past month? (bps) past quarter? (bps)

How have policy rate expectations changed over the…


FX Correlation Heatmaps

Our heatmaps display correlations between daily % changes for variables over the last 30 trading days.

G10 FX CORRELATION HEATMAP

EM FX CORRELATION HEATMAP

Source: Bloomberg, Macrobond & MUFG GMR (as of 18th November 2021)

Key Takeaways:

USD/ZAR and USD/RUB have had the strongest correlations to short-term US yields over the past month. In contrast, USD/BRL and USD/CLP have had the little to no correlation to short-term US rates. The BRL and CLP have been driven more idiosyncratic domestic factors.

EM FX correlations to long-term US rates have been weaker on the whole. USD/CZK and USD/MXN have had the strongest correlations while most other EM currencies have had little correlation to long-term US yields.

USD/ZAR has had the strongest correlation to developed market equity performance. USD/KRW has had the strongest correlation to emerging market equity performance.

USD/RUB’s correlation to the price of oil has dropped over the past week reflecting in part the repricing of a higher geopolitical risk premium into the RUB. USD/ZAR has had the highest correlation to the price of copper.

The most strongly correlated EM FX pairs have been USD/MXN and USD/ZAR, and the least USD/BRL and USD/RUB.

TRY correlations with other high yielding EM FX have been weak over the past month. There has been little correlation with USD/MXN and USD/RUB. The correlation with USD/ZAR has been stronger. USD/CLP has had by far the strongest correlation to USD/CLP although there is no strong fundamental link.

EUR/USD GBP/USD USD/CAD USD/JPY USD/SEK USD/NOK AUD/USD NZD/USD USD/CHF S&P 500MSCI

WorldMSCI EM Brent Oil Gold Copper

US 2YR

Govt Yld

US 10YR

Govt Yld

EMBI

Global Sprd

FX EUR/USD 1.00 0.67 -0.52 -0.45 -0.87 -0.81 0.48 0.65 -0.85 0.31 0.44 0.12 0.19 0.15 0.41 -0.16 -0.13 -0.14

GBP/USD 0.67 1.00 -0.52 -0.20 -0.60 -0.73 0.59 0.73 -0.46 0.38 0.46 0.27 0.21 -0.20 0.35 -0.07 0.17 -0.35

USD/CAD -0.52 -0.52 1.00 -0.02 0.59 0.62 -0.70 -0.74 0.47 -0.30 -0.43 -0.18 -0.28 0.08 -0.36 -0.04 -0.08 0.23

USD/JPY -0.45 -0.20 -0.02 1.00 0.44 0.26 0.06 -0.14 0.49 -0.12 -0.10 0.27 0.15 -0.44 0.18 0.27 0.51 -0.20

USD/SEK -0.87 -0.60 0.59 0.44 1.00 0.78 -0.52 -0.69 0.88 -0.32 -0.46 -0.10 -0.19 -0.19 -0.39 0.15 0.23 0.15

USD/NOK -0.81 -0.73 0.62 0.26 0.78 1.00 -0.66 -0.80 0.69 -0.45 -0.57 -0.25 -0.31 -0.12 -0.48 0.19 0.01 0.27

AUD/USD 0.48 0.59 -0.70 0.06 -0.52 -0.66 1.00 0.86 -0.45 0.34 0.48 0.32 0.28 -0.02 0.49 -0.02 0.12 -0.42

NZD/USD 0.65 0.73 -0.74 -0.14 -0.69 -0.80 0.86 1.00 -0.58 0.48 0.58 0.23 0.20 -0.04 0.45 -0.05 0.09 -0.42

USD/CHF -0.85 -0.46 0.47 0.49 0.88 0.69 -0.45 -0.58 1.00 -0.21 -0.35 -0.01 -0.05 -0.21 -0.28 0.09 0.21 0.08

Equities S&P 500 0.31 0.38 -0.30 -0.12 -0.32 -0.45 0.34 0.48 -0.21 1.00 0.96 0.32 0.18 -0.22 0.37 -0.31 0.08 -0.24

MSCI World 0.44 0.46 -0.43 -0.10 -0.46 -0.57 0.48 0.58 -0.35 0.96 1.00 0.47 0.26 -0.18 0.52 -0.28 0.11 -0.35

MSCI EM 0.12 0.27 -0.18 0.27 -0.10 -0.25 0.32 0.23 -0.01 0.32 0.47 1.00 0.38 -0.09 0.64 -0.15 0.33 -0.50

Commodities Brent Oil 0.19 0.21 -0.28 0.15 -0.19 -0.31 0.28 0.20 -0.05 0.18 0.26 0.38 1.00 -0.01 0.45 -0.37 -0.19 -0.04

Gold 0.15 -0.20 0.08 -0.44 -0.19 -0.12 -0.02 -0.04 -0.21 -0.22 -0.18 -0.09 -0.01 1.00 0.18 -0.14 -0.39 0.20

Copper 0.41 0.35 -0.36 0.18 -0.39 -0.48 0.49 0.45 -0.28 0.37 0.52 0.64 0.45 0.18 1.00 -0.18 0.06 -0.33

FI US 2YR Govt Yld -0.16 -0.07 -0.04 0.27 0.15 0.19 -0.02 -0.05 0.09 -0.31 -0.28 -0.15 -0.37 -0.14 -0.18 1.00 0.48 -0.34

US 10YR Govt Yld -0.13 0.17 -0.08 0.51 0.23 0.01 0.12 0.09 0.21 0.08 0.11 0.33 -0.19 -0.39 0.06 0.48 1.00 -0.67

EMBI Global Sprd -0.14 -0.35 0.23 -0.20 0.15 0.27 -0.42 -0.42 0.08 -0.24 -0.35 -0.50 -0.04 0.20 -0.33 -0.34 -0.67 1.00

30-day Rolling Correlations

Daily % Change

USD/CNY USD/KRW USD/ZAR USD/TRY USD/CZK USD/RUB USD/MXN USD/BRL USD/CLP S&P 500MSCI

WorldMSCI EM Brent Oil Gold Copper

US 2YR

Govt Yld

US 10YR

Govt Yld

EMBI

Global Sprd

FX USD/CNY 1.00 0.22 0.25 0.04 0.26 0.17 0.35 -0.33 0.27 -0.06 -0.14 -0.25 0.04 -0.32 -0.10 0.15 -0.04 0.21

USD/KRW 0.22 1.00 0.39 0.22 -0.08 0.52 0.31 0.07 0.30 -0.39 -0.39 -0.47 -0.47 -0.05 -0.39 0.35 0.07 0.19

USD/ZAR 0.25 0.39 1.00 0.35 0.42 0.40 0.74 0.39 0.29 -0.42 -0.45 -0.34 -0.26 -0.11 -0.51 0.43 0.09 0.22

USD/TRY 0.04 0.22 0.35 1.00 0.39 0.05 0.05 0.20 0.64 -0.06 -0.17 -0.17 -0.37 -0.07 -0.37 0.22 0.10 0.21

USD/CZK 0.26 -0.08 0.42 0.39 1.00 0.12 0.49 0.08 0.21 -0.23 -0.37 -0.09 -0.16 -0.22 -0.44 0.34 0.31 0.10

USD/RUB 0.17 0.52 0.40 0.05 0.12 1.00 0.28 0.03 0.22 -0.29 -0.33 -0.43 -0.36 -0.05 -0.21 0.42 0.06 0.21

USD/MXN 0.35 0.31 0.74 0.05 0.49 0.28 1.00 0.39 0.18 -0.35 -0.34 -0.14 -0.10 -0.10 -0.23 0.34 0.29 -0.01

USD/BRL -0.33 0.07 0.39 0.20 0.08 0.03 0.39 1.00 0.24 0.11 0.15 -0.03 -0.06 0.02 -0.11 -0.01 0.16 0.01

USD/CLP 0.27 0.30 0.29 0.64 0.21 0.22 0.18 0.24 1.00 0.06 -0.04 -0.18 -0.33 -0.17 -0.24 0.02 0.04 0.26

Equities S&P 500 -0.06 -0.39 -0.42 -0.06 -0.23 -0.29 -0.35 0.11 0.06 1.00 0.95 0.32 0.18 -0.22 0.37 -0.31 0.08 -0.24

MSCI World -0.14 -0.39 -0.45 -0.17 -0.37 -0.33 -0.34 0.15 -0.04 0.95 1.00 0.47 0.26 -0.18 0.52 -0.28 0.11 -0.35

MSCI EM -0.25 -0.47 -0.34 -0.17 -0.09 -0.43 -0.14 -0.03 -0.18 0.32 0.47 1.00 0.38 -0.09 0.64 -0.15 0.33 -0.50

Commodities Brent Oil 0.04 -0.47 -0.26 -0.37 -0.16 -0.36 -0.10 -0.06 -0.33 0.18 0.26 0.38 1.00 -0.01 0.45 -0.37 -0.19 -0.04

Gold -0.32 -0.05 -0.11 -0.07 -0.22 -0.05 -0.10 0.02 -0.17 -0.22 -0.18 -0.09 -0.01 1.00 0.18 -0.14 -0.39 0.20

Copper -0.10 -0.39 -0.51 -0.37 -0.44 -0.21 -0.23 -0.11 -0.24 0.37 0.52 0.64 0.45 0.18 1.00 -0.18 0.06 -0.33

FI US 2YR Govt Yld 0.15 0.35 0.43 0.22 0.34 0.42 0.34 -0.01 0.02 -0.31 -0.28 -0.15 -0.37 -0.14 -0.18 1.00 0.48 -0.34

US 10YR Govt Yld -0.04 0.07 0.09 0.10 0.31 0.06 0.29 0.16 0.04 0.08 0.11 0.33 -0.19 -0.39 0.06 0.48 1.00 -0.67

EMBI Global Sprd 0.21 0.19 0.22 0.21 0.10 0.21 -0.01 0.01 0.26 -0.24 -0.35 -0.50 -0.04 0.20 -0.33 -0.34 -0.67 1.00

30-day Rolling Correlations

Daily % Change


London:

MR DEREK HALPENNY Head of Research, Global Markets EMEA & International Securities

E: [email protected]

MR LEE HARDMAN Currency Analyst


MS MOMOKO MIYACHI Research Assistant


Shanghai:

MR MARCO SUN Chief Financial Markets Analyst


Hong Kong:

MS LIN LI Head of Global Markets Research Asia


Dubai:

MR EHSAN KHOMAN Head of Emerging Markets Research – EMEA E: [email protected]

Tokyo

MR MINORI UCHIDA Tokyo Head of Global Markets Research


MR TOSHIYUKI SUZUKI Senior Market Economist


MR TAKAHIRO SEKIDO Chief Japan Strategist


MS SUMINO KAMEI Senior Analyst


MR TEPPEI INO Senior Analyst


MR TOMOKI HIRAMATSU Research Assistant


Singapore:

MS SOPHIA NG Analyst


Sao Paulo:

MR CARLOS PEDROSO Senior Economist E: [email protected]

MR MAURICIO NAKAHODO Economist E: [email protected]





CERTIFICATION

The author(s) mentioned on the cover of this report hereby certify(ies) (or, where multiple authors are responsible, individually certify with respect to each security that the author covers in this report) that the views expressed in this report accurately reflect their personal views about the subject company(ies) and its (their) securities, and also certify(ies) that they have not been, are not, and will not be receiving direct or indirect compensation in exchange for expressing any specific recommendation(s) or view(s) in this report.

DISCLAIMERS

DISCLAIMERS

This report has been prepared by the Global Markets Research, US Rates and Credit Strategy desks within MUFG Bank , Ltd. (“MUBK”) and MUFG Securities EMEA plc (“MUS(EMEA)”) and may be distributed to you either by MUBK, MUS(EMEA) or by another subsidiary of the Mitsubishi UFJ Financial Group (“MUFG”).

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