From JP Morgan FX Markets Weekly after the stronger than expected NFP result:

  • The dollar’s reversal this year has been much smaller than the turnaround in other, former high fliers like the Nikkei, social media stocks and virtual currencies. But a capitulation element emerges in all of these.
  • What is the evidence of capitulation in FX? It’s high – a complete reversal of speculative positions in aggregate and across individual pairs since last spring, plus a small-scale shift back into carry strategies by currency managers.
  • FX vols too are at record lows for this phase of the Fed cycle.

Normally this backdrop would bias the dollar higher if the economy ever delivers consistent growth. The problem is the lack of capitulation on shorts in Treasuries, which frustrates a yield rise. The USD index should therefore remain trendless. Focus instead on a mix of trading themes rather than a directional one. These include selective USD strength, carry, European relative value and EM hedges.

More:

Macro Trade Recommendations:

  • Stay moderately long USD after the strongest payrolls report in more than two years but only where local positions are stretched (NZD) or where the domestic macro-story story is lackluster (CAD). Watch the next dairy auction on May 6th as a potential bearish NZD trigger.
  • The Norges Bank could nudge its rate forecasts higher at its June meeting. Stay long NOK, partly as a carry trade (vs EUR) and partly on relative macroeconomic/policy/positioning considerations (SEK and GBP).

FX Derivatives:

  • FX vols are little changed despite an above-consensus payrolls report. The burden of repeating bullish vol seasonals in May is almost certainly down to the Ukrainian elections later in the month. EUR bears are better off considering put spreads or at-expiry RKOs to position for an activist ECB than standalone EUR puts. AUD/CAD skews trade at multi-year tights, offering good entry levels into bearish AUD risk-reversals.

Technical Strategy:

  • The setup for NZD has improved after holding critical support levels against the USD and crosses.
  • The reversal from key levels for AUD/USD and crosses suggests additional AUD underperformance.
  • Stay long USD/CAD, NZD/CAD, USD/JPY, USD/SEK, USD/NOK, USD/CZK, EUR/TRY, USD/RUB, EUR/PLN, MXN/CLP, and USD/CLP & short AUD/SEK, AUD/NOK, AUD/NZD, EUR/USD and CAD/MXN

Also from JP Morgan from this report: