Macro FX ideas on dollar basket style stratergy - Westpac

Analysts at Westpac offered their trading plan that consists of being short 1 unit USD basket comprised of long 1/3 EUR/USD (1.1081), short 1/3 USD/JPY (113.09), short 1/3 USD/CAD 1.3608. Their stop strategy is: -0.4% on basket, raise stop to entry at +1% basket return, Target: +2% basket return.

Key Quotes and rationale:

"The weaker May NY Fed Empire survey suggests that a correction in the strong US confidence gauges may have finally commenced. Philly Fed (Thu 18 May), Richmond Fed (Tue 23 Mar) and Markit’s PMI (Wed 24 May) are the next key surveys to watch. Weaker reads will raise the prospect of an ISM manufacturing survey that skids toward 50. Animal spirits unleashed by Trump / strong outperformance in the “soft data” has long been overdue a correction. Simultaneously Washington risks are tilting in less market friendly direction - the deepening “Russia-gate” scandal raises already elevated political/congressional obstacles to passage of Trump’s reflationary policies yet further, both as an all-consuming distraction and by reducing the President’s political capital/support in Congress.

EUR/USD’s breakout to fresh six month highs has fixed income support with the Bund-Treasury 10 year spread compressing to its narrowest levels in about six months. There is some chance that the 8 June ECB may not match emerging expectations for a less dovish pivot. Recent ECB comments suggest Draghi will note the broadening recovery but that it is still too soon to ease up on accommodation. But, that is not a story for another three weeks.

USD/CAD topside looks spent – OPEC is showing more resolve to tackle oversupply while CAD IMM net short spec positions hit an eye-watering record high of 86.2k contracts last week.

USD/JPY appears to have peaked for now, JPY should be among the more obvious beneficiaries from a weaker run in various US business surveys.

Open trades: Short 1 unit of a USD basket comprised of equal weighted long positions in EUR (entry 1.1081), JPY (entry 113.09) & CAD (entry 1.3608)."