USD: Back to Bullish. Bullish.
We expect volatility to increase this week, keeping the USD bid as investors demand for safe haven assets. We expect the USD to resume its appreciation against EM and commodity currencies while staying offered against surplus currencies with low nominal yields, such as JPY and CHF. The markets are currently underpricing the probability of a Fed rate hike this year. If macro data does not deteriorate, this could result in a repricing of rate expectations, which would help the USD rally.
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EUR: Risk Events Unfold. Neutral.
We think EUR will continue to come under selling pressure this week as the EU referendum happens. With EURUSD 1m implied volatility still low compared to that of GBP, it seems that markets may not have priced in enough downside risks and EUR is an attractive hedge for Brexit. Other European risk events this week are the German Court ruling on the OMT and Spanish elections, which have been off the radar for EUR investors. With the polls pointing toward an inconclusive outcome for the Spanish elections, there is risk of rising populism, which could add to Euroscepticism.
JPY: Unstoppable Strength. Bullish.
The BoJ keeping policy unchanged has helped USDJPY break the previous low of 105.55, and we believe there is room for further JPY strength even if the BoJ may consider easing at the next meeting. With uncertainty around the EU referendum taking center stage over the next week, we like buying JPY due to safe haven-related demand and Japanese retail accounts potentially reducing long GBP positions. While USDJPY may temporarily rebound to 106 in a vote to Remain, we would use any rally to sell.
GBP: Staying Volatile. Bearish.
We expect GBP to remain volatile over the next week as voters head to the polls. With our economists raising the probability of Leave to 45% and recent polls indicating the Leave camp gaining traction, the outcome has become more unpredictable and GBP will remain sensitive to poll results before the official results. As such, we would refrain from trading GBP before the vote. In the event of a distinctive win for Remain, we expect GBP could see a relief rally to 1.47 on the day. In a vote to leave, GBP could dip to 1.33.
CAD: Still Bearish. Bearish.
We maintain our bearish view on CAD as we believe the market isn't pricing enough downside risks to the outlook. The BoC has maintained an upbeat tone with Poloz arguing that the economy is making "real progress" and supporting a wait-and-see approach to the recent wildfires and trade data. However, we are still skeptical of Canada's rotation away from the resource sector with April's trade data showing little rebound after a sharp reversal of export growth in the last few months and few promising industries which can be the engines of growth in the future. With a weaker than expected 1Q GDP and the impact of the wildfires expected to show up in May's data, we think there are increasing risks of the BoC turning dovish in the July meeting. A further fall in oil prices or risk appetite support our bearish view as well.
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: Risk Dependent. Neutral.
New Zealand's latest GDP print has surprised to the upside driven by strong consumption growth, supporting our view that NZD will continue to be supported by strong migration. However, the currency will be weighed by negative risk sentiment developing around the EU referendum this week. In Remain, NZD would likely rally along with risk and commodities. However, in a vote to Leave, NZD would likely sell off due to global risk-off and the country's trade links with China, which have high trade exposure to the EU.