UBS out with a report on its macro drivers for the year ahead
2019 is right around the corner and banks continue to roll out their big calls for the year ahead.
The latest is UBS who is out with its set of big macro ideas for the year ahead. The trades are organized around four themes and include three currency trades.
Theme #1:
One theme is inflation convergence amid broadening policy normalization. They believe there is scope for an upside surprise in eurozone inflation and that will boost the euro. However they shy away from buying EUR/USD because of the negative carry. Instead they recommend long AUD and NOK against CAD and USD.
"Our previous work has shown that the USD has become increasingly sensitive to foreign yields, but much less sensitive to US yields. Combined with our work on inflation convergence, this suggests that rising front-end yields outside of the US in 2019 should lead to a weaker USD," they write.
For me, I hate overcomplicating a trade and would rather just bite the carry bullet and go with EUR/USD longs. That said, I'm not sure I love the premise but at 1.1285 the euro isn't exactly expensive.
Theme #2:
Chinese fiscal stimulus is the second theme and they keep it simple here with a basic long USD/CNY.
"Not only do we expect the balance of payments pressures to continue to weigh on the CNY, but we also expect monetary policy divergence to sustain. The combination of the two should be enough to push USD/CNY to 7.30 in 2019," they write.
This trade is vulnerable to whatever happens with Trump and Xi so you might want to wait until after the weekend to consider it. That said, short CNY was been a great trade for a long time, albeit not the most-exciting one.
Theme #3:
Political risk in Europe is overdone, UBS says. They expect this year's weakness in the eurozone to reverse next year and that current levels are attractive.
In FX, they say a clear way to express this is short the Swiss franc and they like long EUR/CHF.
"The re-emergence of systemic European event risk (Italy, Brexit) in 2018 has revived the bid for perceived 'safe-haven' assets, such as CHF. However, a lot is already in the price, and risks are now arguably skewed towards a détente. This is especially so if the European cyclical backdrop improves in line with our views," they write.
UBS says the Italian worries are overdone.
A final theme they have is that markets are late in the expansionary cycle. They expect that to boost oil but don't pair it with an FX trade.
