A Challenging Environment For FX: How To Position?
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European currencies have reversed some of their April gains during the first days of the new month as markets continue to grapple with the various cross-currents which are driving FX markets at present. The appreciation of EUR/USD appears to have gone unabated as ECB council members have had opportunity to verbally intervene in EUR/USD as it moved above 1.15 but have so far failed to do so. Part of this reluctance may stem from a growing realization that verbal intervention has become incrementally less effective but also an acceptance that the move reflects broad based USD weakness.
The EUR's performance over the past month, for example, did not reflect unilateral outperformance versus all other G10 currencies as the likes of JPY, CAD and NOK all put in stronger gains versus USD.
Though we remain bullish USD over the coming year, we readily concede that an improvement in broader US macro data will be needed to persuade the Fed and the market of the need for imminent tightening.
For now, the relative improvement in Euro Area data versus the US is one force that is likely to weigh on USD for now. At the same time, USD now looks excessively weak relative to both its nominal and real rate anchors.
Consequently, with such conflicting near-term signals, we remain focused on trades with idiosyncratic stories such as short GBP/USD and short EUR/CHF ahead of the EU Referendum.
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