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FX Strategy Weekly

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Tactical view:

Short speculative GBP positions have been cut back over the last four weeks, but overall are still well above historical norms. This leaves scope for an (extensive) short squeeze if the Labour party is defeated next week Thursday, with the biggest move potentially earmarked for GBP/JPY depending on equity market reaction to US nonfarm payrolls. The dollar index hit our 82.24 target this week, cruising to a 82.71 high on flight-to-quality and outflows from the EUR. We look for the index to stay supported near-term, but within ranges unless the EU/IMF loan deal falls through (unlikely) and Chancellor Merkel loses the regional election in the state of NRW on May 9 (possible). We now target the 18 May-09 high, though admit that progress could stall if risk assets make it through next week unscathed. We look for the RBA to raise rates to 4.50%, but favour fading (stretched) long AUD positions if the accompanying statement takes on a neutral tone.

GBP surrendered gains this week vs a handful of currencies but finished the month of April across its G10 peers except vs the NZD. GBP logged a gain of 2.9% this month vs the JPY and a 2.5% gain vs the EUR and Swiss franc. Light trading conditions ahead of the general election next week Thursday could result in erratic price swings, with market moving US macro data and risk appetite set to dictate trends. The EUR experienced another tormenting week, sliding 2.8% vs the NZD (top weekly performer), 1% vs the AUD and 0.8% vs the USD. An EU/IMF bailout is reportedly a matter of hours and should help the EUR to stage a relief bounce.

UK data was very thin on the ground in the past week. Nationwide house prices rose 1% in April, inflating the annual rate to 10.5%, the highest level since June-07. The CBI distributive trades survey reported steady sales in April vs March. The level of expected sales rose for a 4th successive month, reaching a 5-month high. Consumer confidence fell back for a second straight month in April. The FTSE-100 closed below 5,600 for the first time since March 5, hit by soverign debt jitters and a retreat in US stocks.

UK 5y swaps were rangebound and closed the week at 2.98%. The long-end of the curve outperformed the front-end, compressing the 2y/10y swap spread to 212bp. Gilts outperformed Treasuries and bunds. UK 10y swaps spreads to tighten 10bp to -1bp. Dec-10 short sterling rebounded off last week's low, rallying to 98.85.


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