USD: Lower USD for Now. Bearish.
This week's Fed meeting has done little to change our view that USD is likely to remain weak in the coming months. While the Fed inserted a line about diminished risks, this is more an affirmation of current market pricing and consistent with the view that the Fed wants to provide itself optionality to hike this year. However, we expect inflation and growth data to slow in 2H and ultimately force the market to price out hikes as the Fed chooses to eventually be more cautious. As long as risk appetite remains supported, investors' search for yield continues and market pricing of rate hikes doesn't move much higher, we expect USD to weaken from here.
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EUR: Staying Bullish. Bullish.
While any negative results may weigh on EUR, this is likely to be temporary, helped by the ECB's endorsing of a public backstop for NPLs. Therefore, we stay bullish on EUR on the basis of rising real yield differentials and EMU's weak banks and insurance companies not exporting sufficient long-term capital to counteract inflows from the EMU's current account surplus. Our favored way to play this bullish EUR view is through long EURGBP positions.
GBP: BoE Dictates GBP. Bearish.
This week, all eyes will be on the BoE rates decision on Thursday, where we are long EURGBP and like to sell GBPUSD on rallies. Given the marked slowdown in the UK's survey data and the previously hawkish MPC member Weale supporting monetary stimulus, some form of easing seems inevitable. Here, the size of the easing package will be key. Markets have priced in a 25bp rate cut, but our economists are forecasting a 40bp cut with potential for additional QE, suggesting that GBP still has downside potential. The bearish GBP trade won't stop there, supported further by weak survey data translating into weak hard economic data
CHF: Strength Against USD. Bullish.
We think that CHF should stay relatively stable against EUR but appreciate against USD. Switzerland has a 10% of GDP current account surplus, suggesting that commercial buying needs will help the currency to stay supported. At the same time, banks are reducing fresh foreign lending due to balance sheet constraints, reducing CHF outflows. We would promote selling USDCHF to hedge against the long calendar of European political risk events starting in October, as CHF tends to strengthen when the source of risk sell-off originates from within Europe. Furthermore, CHF yields remain very low already so it will be difficult to weaken them through further rate cuts (though the SNB can intervene in times of high volatility to prevent excessive appreciation).
CAD: Turning Neutral. Neutral.
We have turned neutral CAD following the surprisingly hawkish BoC meeting. Despite revising down its growth forecast and pushing back the date of output gap closure, the BoC maintained a neutral tone and showed no willingness to ease any time soon. Based on rhetoric from the press conference, it appears more worried about housing than its forecasts imply, understandable following data released yesterday morning showing a further acceleration of nationwide house prices (mainly due to Vancouver and Toronto). The BoC also emphasized a willingness to look through short-term disappointment on trade data and remained confident that data would eventually rebound. However, by forecasting a strong rebound in 3Q and 4Q growth, the BoC has set itself a high bar: if growth fails to meet these optimistic expectations, easing may come back on the table. For now, we don't like trading CAD from the short side and believe it can appreciate further from here, though positioning remains very long.
AUD: CPI Weak Enough for RBA Cut. Bearish.
This week's 2Q CPI print was slightly better than expectations on underlying inflation measures, but we expect that it is still weak enough to push the RBA to cut rates at next week's meeting. Inflation remains comfortably below the 2-3%Y band and it is unlikely that the RBA's SMP forecasts will be revised much higher in light of this print and with AUD's appreciation in recent months. With the market closer to 50/50 now for a cut, risk/reward for short AUD positions has improved. Even without a rate cut, our long-term bearish view remains and we expect the turning housing cycle to weigh on domestic demand growth over the next year, weakening AUD.
NZD: Near-Term Weakness. Neutral.
The weak CPI and high TWI have pushed the RBNZ to release an economic update foretelling easing at the August meeting. For now, we believe that NZD can weaken ahead of the meeting if markets price a more aggressive easing path. However, we are skeptical about the RBNZ's willingness to follow through on substantially more easing than market pricing, and housing remains a concern despite upcoming macro-prudential regulations. We await more clarity from the August MPS and expect that NZD could then outperform if the global search for yield continues.