Deutsche Bank strategists say the range-bound trading in the currency markets could be ending.
The currency markets have seen extremely low volatility lately despite a spate of political events and economic reports – but the strategists at Deutsche Bank say we are about to live in interesting times once again.
“Looking back over the last 12 years, there have only been five episodes where a lack of trend across all 42 G-10 crosses has persisted for more than the current period,” they wrote in a note to clients. And just in case you’ve been lulled into thinking that this time is different, the strategists point out that “central banks are coming back into play” and indicating clear direction shifts, like the Bank of Canada’s increased hawkishness and the potential for easing from the Reserve Bank of Australia. Also, emerging market currencies seem to follow a pattern, they say: “May and June both tend to provide above-average returns for trend-following strategies.”
So how do you play this potential shift?
The strategists are bearish on the euro, dollar, and the yen, expecting their year-to-date underperformance to continue. So they suggest selling those against other currencies, like the British pound, Canadian dollar, and Swedish krona. In emerging markets, they like the Mexican peso, South Korean won, and South African rand.
Time to get busy…
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Learn more: The essential vocabulary for currency trading is on Key Terms Dictionary. Top currency strategies are broken down for you in Currency Class.