Key FX Themes into Year-End

1.Risky Asset Correlations Likely to Remain High

2.Still Constructive on the Cyclical Outlook
Combining this cyclical stance with high cross-asset correlations suggests that currencies such as the AUD and CAD, as well as the EUR and GBP, still have upside potential in the near term. The Yen, and in particular the Dollar, will likely face downside pressure on this basis. EM currencies, especially higher-yielding ones, should continue to do well, as expressed in our high-conviction EM Carry Top Trade.

3.Sequencing the Global Monetary Policy Tightening
With rising rates, carry differentials may well come into play among major currencies and this could further boost cyclical currencies. In some cases (such as with the AUD), expected policy tightening already appears to have become an important factor that signals further upside potential

4.Dollar Recovery? Not Yet!
In the near
term, we see the risks skewed towards some temporary
overshooting and can see EUR/$ testing the 1.50 area.

5.Seasonal Patterns into Year-End
Given that
manufacturing orders have started to bounce fairly strongly
recently, European exporters could find themselves falling
behind their hedging benchmarks. This could imply some
last-minute EUR/$ buying this year as well.

6.Becoming More Optimistic on CEE Currencies
The crisis hit credit-exposed Eastern Europe particularly
hard, arguably much more than other Emerging Market
regions. Even as global cyclical forces once again turn
supportive for risk taking, CEE assets continue to trade
with a higher risk premium.

7.FX Policy Events
In addition to the possible debate over fast-tracking EMU
entry in Eastern Europe, a few other events on the
schedule for FX policymakers are worth watching, in
particular:

• The G20 summit on September 24-25 in Pittsburgh.
• The Irish Lisbon Treaty referendum on October 2.
• The G7 Finance Ministers meeting on October 3.
• The IMF Annual Meeting in Turkey on October 3-5.

8.Growth Differentiation and Carry
we like
currencies with relatively high carry and with relatively
strong growth. Historically, both have performed very
well in a post-recession environment, where risk premia
are high, and rate differentials between EM and DM
remain relatively high, often to support nominal exchange
rate stability. However, given the correlation with cyclical
assets, we are keeping a close eye on equities.