Two Trade Ideas

I recommended to our clients to buy Canadian dollars against the yen in Asia today near JPY86.80. During the near panic yesterday this cross collapsed to a degree we have simply not seen before. It traded 5 standard deviations form the 20-day moving average. A move of this extreme was not during the 2007-2009 crisis.

The Canadian fundamentals are among the least impacted by Greece. US banks have some small exposure, according to the BIS and US companies that service Europe either through exports or through local affiliate sales are exposed in a way that Canada and Canadian companies are not. As the April employment data illustrates, the Canadian economy is the only G7 economy that can compare to the US growth prospects this year and next. The combination of the weaker Canadian dollar and strong employment data should reinforce expectations that the BOC raises rates. Japan's growth prospects look a bit better than the they did at the start of the year.

However, deflationary pressures remain and the strengthening of yen is the exact opposite of what Japan would like and arguably needs. The risk is that Japan, not the UK or US sees its credit rating downgraded this year. The political situation is also fluid as the DPJ have disappointed (leaving aside the economy, the Okinawa base issue and the scandals have cut support), leaving it vulnerable in the upper house elections in a couple of months. My objective is JPY91-JPY92.. A favorable move has already been seen, so I won't recommend chasing it, but some may find a modest pullback a more attractive buying opportunity.

The other idea is to buy sterling vs the euro. The euro's woes are known, but why buy sterling ? It is really more of a hunch and feel, but we are probably in the maximum uncertainty now. And when it is resolved, it may be too late to buy sterling for a good bounce. I recommended it when the euro was slightly above GBP0.8700. The risk seems limited to the GBP0.8800 area and the near-term potential may extend to GBP0.8500-GBP0.8600.