USD and JPY still bid

Market Comment:

• We believe, stories on Hedge Fund Redemptions and Performance are of special importance these weeks. As long as investors are redeeming their capital from Hedge Funds (and they will do that as long as the market is under considerable pressure and HF performance is miserable), Stocks, EURUSD, Crude Oil and Gold will be under pressure. From an FX perspective, that means that NOK and CAD (which are both energy related) should be underperforming other currencies and that the USD should continue to go higher, since the market wants USD for clearing the money market. EURUSD in 1.20 seems to be the next likely stop (but the cross could experience an intraday bounce above 1.25). Parity cannot be ruled out before New Year.
• The G7 countries in an unscheduled statement warned against "excessive JPY strength". This might be important as the BoJ previously has been succesfully intervening in the market to prop up the USD (and keep JPY weak). Naturally, an intervention now would focus more at the high-yielding currencies (AUD, NZD) and especially on the EUR.
• The Eastern European currencies remain under considerable pressure as the Credit Default Swap prices on (among others) the Eastern European Sovereign debt have exploded over the past weeks. Some current 5-year CDS prices need to be mentioned:

Hungary: 605 bps.

Poland: 261 bps.

Russia: 1116 bps.

Estonia: 659 bps.

Lithuania: 631 bps.

Latvia: 980 bps.

Iceland: 968 bps.

• The great majority of these countries are now - mistakenly - trying to defend their currencies by hiking o/n rates. That means that any speculation against them will be punished if positions are maintained overnight. We recommend buying USDHUF at the break of 227.60 (see graph below). Intraday positions will not pay the almost prohibitive o/n rates, so we advice clients to close positions after a quick profit. Keep stops below 222.