USD: Cautious on USD. Neutral.
The recent labor market report is a game changer for USD, and we are no longer bullish in the near term.
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Until there is more clarity on whether the report is actually a sign of a deceleration in the economy, USD will have a hard time rallying. We will be watching upcoming US data closely, particularly the next labor market report. However, we retain our medium-term bullish view on USD and also believe a large enough data deterioration from here would push us to the left side of the USD smile as recession risks come back into focus, similar to the beginning of the year.
EUR: Real Yield Support. Neutral.
We expect the EUR to be supported by rising real yields. Inflation expectations tend to fall when growth worries emerge. The problem is that nominal yields are unable to fall far to compensate because they are already trading close to zero or in negative territory, resulting in the rise of real yields. As EMU has a neutral net foreign asset position, the commercial demand for EUR arising from its 2% of GDP current account surplus will also help support the currency. However, EUR should find it hard to rally strongly due to the regional risk events this month (EU referendum, German Constitutional Court ruling on OMT, Spanish elections).
JPY: Still Bullish. Bullish.
We maintain our structurally bullish JPY view. We don't expect intervention, particularly in light of the current G7 meeting, and don't expect fiscal stimulus to change the trajectory on JPY. With questions about the future success of Abenomics, FX hedging and repatriation flows will continue to drive the currency, and we ultimately expect USDJPY to fall through 100. We believe the BoJ needs to abandon its current framework of NIRP and expanding QQE and adopt more unconventional policy in order to weaken JPY.
CHF: Supported by Real Yield and Risk. Bullish.
In the current low interest rate environment, we view CHF as attractive as it is likely to appreciate both in times of risk-on and risk-off. With a large part of its yield curve in negative territory, CHF's nominal yields have low elasticity to the downside, contributing to rising real yields supporting the currency strength even when risk is supported. If risk sells off, CHF tends to appreciate given its safe haven status. It is also likely to receive additional support from the European risk events this month.
CAD: Fade CAD Strength. Bearish.
Despite recent price action, we maintain our bearish view on CAD as we believe the most recent BoC meeting was not as hawkish as the market took it to be, 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 April's trade data showing little rebound after a sharp reversal of export growth in the last few months. Last week's poor GDP data print points to a decelerating economy and we expect the BoC may shift its tone at the upcoming MPR in July.
AUD: Selling AUD Rallies. Bearish.
We remain bearish AUD and look to sell AUD rallies as we expect RBA easing to push AUD lower. The RBA was hawkish this week by failing to include an explicit easing bias in its statement, which implies easing in July is almost certainly off the table. However, we still believe the RBA will eventually need to react to the worrying inflation trend and still vulnerable external accounts and our economists are now expecting another 75bp of rate cuts. House price growth is the key risk here; recent acceleration has given the RBA pause, but we still believe the trend will reverse and see further macro-prudential regulation as possible if it does not.
NZD: Scope for Further Appreciation. Neutral.
We no longer like holding short NZD positions and believe it could even extend its appreciation in coming weeks. The RBNZ's surprised to the hawkish side yesterday as it upgraded its inflation forecasts and sounded more upbeat about consumption growth. It also pointed to signs of reaccelerating house price growth which, according to the MPS, could lead to rate hikes in the coming quarters if it continues. However, we do note that the RBNZ expects to cut rates by 150bps in the scenario of no depreciation of NZD (as opposed to the 3% expected depreciation). With the TWI already trading above levels assumed in the "flat TWI" scenario, there is risk of rate cuts down the line to cause currency depreciation.