USD remains the strongest currency in the longer term. The market is expecting the Fed to raise rates around September. Recent NFP readings have been positive and core inflation has, overall, been trending higher. Although we expect bullish sentiment on the dollar to remain in the near term, it is near its long-term highs against many counterparts and therefore may be susceptible to pullbacks – such pullbacks will likely provide buying opportunities. The recent FOMC statement showed the Fed are on track to raise rates in the context of an improving economy, however USD saw heavy selling as the economic projections for the FFR in 2016 and 2017 were scaled back. If the market or the Fed see a deterioration of the Greece situation as a threat to global financial stability, then we may see rate hike expectations pushed back.
EUR: The refusal by Greece to accept its creditors’ proposal and instead call a referendum has put more downward bias on the euro. Already a fundamentally weak currency due to extremely loose monetary policy, we now expect its depreciation to accelerate over the medium term. We expect, and have seen, huge volatility in the currency and this will continue until some resolution is found for Greece. The referendum is set for July 5. BofAML forecasts EUR/USD to reach parity by year end.
GBP is looking at a rate hike around the middle of 2016 and is therefore a fundamentally bullish currency in the long term. The latest jobs numbers showed much better than expected average earnings figures and this is very bullish for the pound as it brings forward the timing for rate liftoff. We are also aware of two of the nine MPC members being very close to voting for a rate increase. GBP has had a strong rally over the past several weeks and is currently near long term highs against most counterparts. Barclays forecast the BOE to hike rates in Q1.
AUD: Low commodity prices and a slowdown in China has put bearish pressure on the AUD. Overall the bias for AUD is on the bearish side of neutral, until we see more data. Language from Governor Stephens recently has been dovish. A resumption of the downtrend in base metals will also see AUD pressured.
NZD has a new official cash rate of 3.25% after the RBNZ cut rates on June 11. The Bank has left the door open for further easing and as such the Kiwi dollar is a bearish currency in the medium term. The recent GDP reading showed a huge miss and this adds weight to the chance of another rate cut, with some banks calling for two more cuts in 2015. Kiwi is at multi-year lows. Credit Suisse’s OIS market is pricing an 82% chance of a cut at the July 23rd meeting.