USD: Fed Supports USD. Bullish.
The Fed minutes have supported our bullish USD view, and we see scope for further gains.
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As long as the Fed wants optionality on a June rate hike, rate hike expectations are likely to increase and higher yields should support USD. At the same time, the global economic backdrop has worsened, with China data weakening, and risk appetite has weakened. We are watching core PCE and payrolls this week closely for evidence of improving economic data. We like buying USD against commodity currencies and EM.
EUR: ECB Watching. Neutral.
We expect EURUSD to remain fairly range-bound. This week's CPI and ECB rates decision will be watched, but we do not think they will impact EUR significantly. Our economists are not expecting any policy change from the ECB, though inflation and growth projections could be revised upwards due to higher oil prices. We think this will not impact EUR meaningfully as the markets are only pricing a 5bp rate cut for this year, and the ECB has made it clear that further rate cuts are unlikely, implying yield differentials affecting EUR will continue to be driven by the Fed.
JPY: Tactically Bearish, Structurally Bullish. Bullish.
Our long-term view on JPY remains unchanged, though there is scope for USDJPY to rise on the back of broad USD strength, higher US yields and strong risk appetite. Nonetheless, this is a rally we would sell into, given our structurally bullish JPY view. FX hedging and repatriation flows will continue to dominate, and we ultimately expect USDJPY to fall through 100.
GBP: Asymmetric Risk Profile. Bearish.
GBP has outperformed in recent weeks due to markets reducing the probability of Brexit. We think the markets may have become a little too complacent and the risk profile is now asymmetric, with the risks skewed to the downside. Any turn in the survey data should put GBP under renewed selling pressure. In the longer term, we are also bearish on GBP due to its weakening economy and triple deficit. This week, we watch to see if manufacturing PMI confirms our view of a faltering UK economy.
CAD: Fade CAD Strength. Bearish.
We maintain our bearish view on CAD following the BoC meeting as we believe it was not as hawkish as the market took it and expect further economic weakness will cause markets to price a higher chance of rate cuts. The BoC did not have a large shift in tone but some dovish changes, on capex and the wildfires, open the door for a larger shift at the July meeting (which is accompanied by an MPR). Canada's rotation away from the resource sector is in doubt, with weak March trade showing non-commodity export volumes falling an additional 2% after their nearly 5% fall in February.
AUD: RBA Easing to Push AUD Lower. Bearish.
We remain bearish AUD and expect the RBA easing to push AUD lower. We believe the market overreacted to the RBA minutes and the SMP makes clear that the RBA stands ready to act further, given the very weak inflation trend. Given the worrying inflation trend, falling house price growth and iron ore prices resuming their downward trend, our economists are now expecting 75bp more rate cuts. RBA Governor Stevens' comments this week echo our view that the RBA will gladly watch AUD depreciate in order to help the difficult adjustment. We continue to like holding AUD short positions.*
NZD: Looking to Sell. Bearish.
We like selling NZD in this current USD rally as we expect high-carry commodity currencies to underperform. NZD has benefited in recent days as the RBNZ's financial stability report pointed to rising house prices as a risk and pointed to the possibility of more macroprudential policies. While this, along with some better-than-expected data, has caused the market to price out the probability of RBNZ cuts, we expect this to reverse. However, we don't think macroprudential policies will preclude the RBNZ from cutting, given New Zealand's pressing inflation problem and that the elevated NZD TWI remains too high. With our expectation for commodity prices to fall as well as the RBA's recent dovish turn, we believe the RBNZ will stay dovish and limit currency strength.