USD: Limited Downside Vs AUD, CAD; EUR: Rallies A Sell - Credit Agricole

According to Fed’s Williams both April and June have the potential for rate hikes. He added that the US economy is looking great in isolation and that it proved remarkably resilient to global factors. He added that if it weren’t for global factors, they would have hiked sooner. Looking ahead, we share the view that there is only limited room of even further falling Fed monetary policy expectations. This is especially true as market expectations of marginally more than 30bp in terms of tightening for the reminder of the year stand in contrast to the Fed’s own projections. In line with our own expectations, the Fed anticipates two more hikes this year.

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From that angle we stay of the view that the USD will face only limited downside risks, in particular against risk sensitive currencies such as the AUD and CAD.

The EUR, in contrast, may stay supported should rising rate expectations lower investors’ demand for risk assets. However, in line with our forecasts we expect rallies to remain a sell.

In Australia, RBA Governor Stevens was on the wires. He more or less kept all options regarding lower rates open. Even if domestic conditions have been improving, uncertainty with respect to Asia is keeping the central bank cautious. At the same time it must be noted that a further appreciating currency’s dampening impact on monetary conditions is unlikely welcomed. Indeed, Stevens stressed that the AUD may be getting a bit ahead of itself. It must still be noted that he indicated that the economy is coping well with current conditions.

Even if the AUD has been in demand of late, we see only limited upside risks from the current levels. This is especially true as balanced speculative positioning indicates only limited position squaring related upside risks.