There are two big themes in the markets at the moment that seem to be working against each other.
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On the one hand, we have the fear of a global growth slowdown, which is made worse by the looming Brexit referendum and deteriorating labour market conditions in the US. On the other hand, we have several safety nets that central banks around the world have erected in recent years to prop up market sentiment. At present, the fear of a global slowdown is soothed by hopes of delayed stimulus removal by the Fed and that is weighing on USD. The search for yield is back on and that is helping carry currencies like AUD and NZD. It should be noted as well, however, that poor market liquidity conditions ahead of the Brexit vote likely results in more accentuated moves in the FX markets than warranted by fundamentals.
Next week we have four central banks meeting and key among them is likely to be the June FOMC gathering. Markets are attaching a low probability to a hike in June and July, and presumably expect the Fed to confirm that dovish view by remaining rather vague on the prospect of an imminent hike. Crédit Agricole CIB economists continue to expect a hike in July. Indications to this effect by the Fed, potentially made contingent on the outcome of the EU referendum, should come as a hawkish surprise, which could boost USD and weigh on risk sentiment. The USD also looks pretty cheap relative to rate spreads vs G10 FX.
Alongside the Fed, investors will pay closer attention to the outcome of the BoJ’s policy meeting. Not many dovish surprises are expected and Crédit Agricole CIB economists think that the prospects for further easing may intensify only later this year. All that may point at persistent JPY resilience especially against risk-correlated currencies. The SNB will meet as well and we doubt that the bank is close to announcing any new easing measures. Investors have been buying CHF ahead of the EU referendum and an unchanged SNB could keep the currency in demand.
Last but not least, the BoE June meeting will be overshadowed by the EU referendum. The MPC should reiterate its readiness to act in the event of a Brexit. With some negatives in the price of GBP, a dovish message by the BoE may not have a sustained impact on the currency.