USD: Offered in the Short Term. Bearish.
A slew of disappointing numbers from the US last week, in contrast to outperforming Asian data, suggests a dovish Fed and inflows into EM in search of yield staying with us for now. This implies the USD staying offered in the short term. However, we think the fundamental problems in EM have not changed and our strategic bullish USD framework remains intact.
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EUR: Range Bound Now. Neutral.
We maintain our short-term view for EUR to be range bound and don’t expect anything material from next week’s ECB meeting. However, forward-looking indicators point to a sluggish 2Q following a strong 1Q, while Brexit risks and signs of increasing populism (such as the Dutch referendum result) have limited the EUR upside. We remain long-term bears.
JPY: Bullishness Remains. Bullish.
Focus remains on the BoJ’s meeting at the end of April, with the market assessing what the BoJ can do to weaken JPY. We remain JPY bulls and believe that, outside of a substantial increase in ETF/Equity purchases or direct FX intervention, (neither our base case), it will be difficult for JPY to weaken. Last week’s portfolio data showed large repatriation from domestic investors for the second straight week, showing negative rates won’t necessarily cause portfolio outflows to weaken JPY.
GBP: Brexit Campaigns Start. Bearish.
With the Brexit campaigns officially starting this week, we expect volatility in GBP to increase. This uncertainty will not only have a direct negative impact on GBP in the short term, but could also deter investment in the UK, which affects longer-term economic growth. With the UK economy already running a current account deficit of 7% of GDP – the highest since records began in 1955 – Brexit concerns only reinforce our bearish view on GBP.
CHF: EU politics watched. Neutral.
For now, we expect EURCHF to remain fairly range bound but are waiting for opportunities to sell longer term. In times of global risk-off, the CHF tends to underperform the JPY. However when it is a European issue, such as the pressure from the rise of populist parties and Brexit worries, the CHF tends to strengthen. The Dutch referendum is another sign that political risks are rising in the Eurozone. We don’t think the SNB would outright reverse CHF appreciation through intervention, but they could limit the magnitude.
AUD: Temporary Stability. Neutral.
We remain medium-term bears on AUD and have entered a structural short AUDUSD trade at 0.7650, though believe we may see some stability ahead of 1Q inflation. This week’s employment data was mixed, with a strong headline but weak fulltime/part-time split, though it is likely good enough for the RBA to maintain its neutral bias. We still expect the RBA to ease by 50bps this year as commodity prices fall and data deteriorates and view further appreciation of AUD as increasing the risks these cuts happen earlier than expected.
NZD: Sell Rallies. Neutral.
Supported by strong data prints from China, NZD has rallied to its year-to-date high of 0.6952. While the currency may be supported by risk appetite and a weak USD in the near term, we think the RBNZ is likely to push back against this unwanted currency strength. This week, we watch the dairy auction to see if the rise in dairy prices at the last auction will be sustained. CPI numbers will also be in focus as the economy grapples with low inflation.