Week Ahead: With A Mixed USD Outlook, It's Time To Trade EUR Crosses-CA

The USD staged a bigger comeback mainly on the back of this week’s release of Fed minutes, from the 26-27 April FOMC meeting, which provided a greater case of June being considered as a live meeting. However, the central bank also explained that incoming data will continue to be a key driver of the central bank’s decision making process. If anything, it must still be noted that external risk events such as the EU referendum have been preventing rate expectations from rising more considerably.

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From that angle it still appears unlikely that short-term rate expectations will face more considerable upside risks from current levels. Indeed, our economists are of the view that the Fed will not tighten monetary policy ahead of the July meeting.

As a result of the above outlined conditions USD upside may be limited in the short-term still. However, it should stay attractive to buy dips against low yielders such as the CHF. This is also due to the notion that central banks such as the SNB remain in a position to stick to an aggressive policy mix for longer. As the overvalued franc itself is keeping monetary conditions too tight, it will be about a further currency depreciation to make a case of stabilising price developments.

We similarly believe that majors such as EUR/USD may prove more range-bound in the weeks to come, especially as the ECB is nowhere close to considering additional policy action, especially as medium-term inflation expectations as measured by 5Y inflation swaps have been broadly stable. Hence, there is limited room of diverging monetary policy expectations in the very short-term. All of the above means too that crosses such as EUR/CHF and EUR/JPY may be subject to upside risks. In both cases we stay long.*

The GBP has been supported on the back of the recent polls, suggesting a falling probability of the UK exiting the European Union. However, in order to trigger a sustainable trend the EU referendum may still have to pass. In the meantime GBP should stay within this year’s trading range.

CAD – The BoC may refrain from turning much more dovish on the back of recently weaker data. CAD upside still remain limited against the USD.

GBP – Any indication of growth conditions having held up better than feared on the back of intact Brexit fears may keep the GBP subject to upside risks.

JPY – It seems unlikely that price developments have stabilised sufficiently in order to decrease BoJ easing expectations further.