Hot trades?

Vassili Serebriakov, FX analyst at 4CAST Inc., sees a change for forex traders in 2008.

“I think 2008 is not going to be about straightforward plays like the carry trade or a simple short bet on U.S. dollar weakness,” he says. “It’s going to be about relative-value trades.”

4CAST Inc. is forecasting aggressive and early rate cuts by the ECB. While most of the market expects a June rate cut, 4CAST Inc. expects a 25-bp cut at the March meeting, which would tug the repo rate to 3.75 percent.

“In terms of rate cuts, the euro doesn’t have much priced in,” Serebriakov notes. “The ECB has been consistently hawkish thru the credit turmoil, but we think they will not be able to avoid cutting rates.”

This could present interesting opportunities in various euro cross rates, according to Serebriakov.

“There is an argument the euro crosses are quite expensive,” he says, citing the euro/Swiss (EUR/CHF) and euro/Aussie (EUR/AUD). “If the ECB comes in with rate cuts faster than the market expects, the euro could weaken vs. the Swiss franc and the Aussie.”

Shifting back to the greenback, most currency analysts seem to agree that a midyear U.S.-dollar turnaround is likely, with a decline in the euro/dollar pair (UR/USD) to the 1.40 level by year-end.

However, no one has a crystal ball.

“We know what the risks are,” Credit Suisse’s Basile says. “It is just a matter of time to see how the cycle plays out.”