USD, EUR, GBP, CAD, AUD, NZD: Weekly Outlook
Setups: EUR/USD, USD/JPY, GBP/USD, AUD/USD, NZD/USD, USD/CAD
EUR/USD: We are overall bearish and would prefer to fade upticks against resistance in the 1.1350 area. Our downside targets are towards 1.1125 and then 1.0990.
USD/JPY: Yesterday’s small topping candle warns of downside risk. A low close today would encourage us to become more bearish in the short term towards targets near 108.20. Below 108.20 would point lower towards our next targets near 106.40 and then 105.20.
GBP/USD: Thursday’s topping signal ahead of resistance in the 1.4680 area has prompted us to turn bearish in the short term. Our targets are towards the 1.4340 area.
AUD/USD: Yesterday’s small basing candle signals a breather from recent weakness. We are sticking with our bearish view following the close below 0.7260, the 200-dma. Our targets are towards 0.7040 and then the 0.6825 year-to-date lows.
NZD/USD: Low volumes (See Figure 2) along with yesterday’s base candle helps keep us bearish. We are looking for a move below 0.6710 low to signal lower towards targets near 0.6665 and then 0.6545.
USD/CAD: No change. The break above the 1.3015 range highs has prompted us to pare back our bearish view in the short term. Risk is a squeeze higher towards 1.3220 before sellers emerge.
USD, EUR, JPY, GBP, CHF, AUD, NZD: Weekly Outlook
USD: Fed Supports USD. Bullish.
The Fed minutes have supported our bullish USD view, and we see scope for further gains. As long as the Fed wants optionality on a June rate hike, rate-hike expectations are likely to increase and higher yields will support USD. At the same time, the global economic backdrop has worsened with China data weakening and risk appetite falling. We like buying USD against commodity currencies and EM.
EUR: Watching Political Risks. Neutral.
We expect EURUSD to be driven mainly by the USD leg in the short term, supporting some downside as it has broken the April low of 1.1220. We believe the currency will find it difficult to rally significantly with many risk events coming up in June, such as the German Constitutional Court deciding on the legality of the OMT, the UK's EU referendum and the Spanish elections. In the medium term, EURUSD is likely to be range bound.
JPY: Tactically Bearish, Structurally Bullish. Bullish.
Our long-term view on JPY remains unchanged, but we see scope for USDJPY to rise on the back of broad USD strength and higher US yields. Nonetheless, this is a rally we would sell into given 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. FX hedging and repatriation flows will continue to dominate, and we ultimately expect USDJPY to fall through 100.
GBP: Beyond Brexit. Bearish.
GBP’s sensitivity to the EU referendum polls has increased this week with the polls shifting towards remain. We believe the currency is going to remain sensitive to oil and equities too, so have kept our short GBP position in the portfolio but note the increased volatility expected around any more shifts towards the remain camp. EURGBP has downside potential to 0.7520 given the risks around the German Constitutional Court judging on the OMT and Spanish elections happening in June.
CHF: Supported by Europe Risks. Neutral.
CHF tends to outperform when asset volatility rises due to risks within Europe. With the EU referendum and German Constitutional Court ruling on the legality of the ECB's OMT in June, we think asset and FX volatility will increase and like selling EURCHF. On the other hand, USDCHF is likely to be driven higher by the USD leg in the short term. Over the medium term, we expect EURCHF to remain fairly range bound.
AUD: RBA Easing to Push AUD Lower. Bearish.
We remain bearish AUD and expect the RBA easing in August to push AUD lower. We believe the market overreacted to the RBA minutes and the SMP makes clear that the RBA stands ready to act further given the very weak inflation trend. Data this week supports our view with weak wage growth and a poor breakdown of the employment data. As iron ore continues to fall and China's mini cycle slows, we expect AUD will need to depreciate further.
NZD: Looking to Sell. Bearish.
We like selling NZD in this current USD rally as we expect high carry commodity currencies to underperform. NZD has benefited in recent days as the RBNZ's financial stability report pointed to rising house prices as a risk and pointed to the possibility of more macroprudential policies. While this, along with some better than expected data, has caused the market to price out the probability of RBNZ cuts, we expect this to reverse. However, we don't think macroprudential policies will preclude the RBNZ from cutting given New Zealand's pressing inflation problem and elevated NZD TWI remains too high. With our expectation for commodity prices to fall as well as the RBA's recent dovish turn, we believe the RBNZ will stay dovish and limit currency strength.
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USD: Buy USD vs Commodity. & EM Currencies. Bullish.
The Fed's broad USD index has rallied by 2% since the start of May, driven by a reduction of extreme short positioning in USD and a correction in commodity markets which we expect to continue. With the Fed's Dudley suggesting that two rate hikes this year remains reasonable, the current underpricing of the Fed by markets will need to adjust, supporting USD strength. This week's CPI numbers and FOMC minutes will be important in influencing markets' expectations of the Fed.
EUR: Low Yielders to Outperform. Neutral.
We believe EUR will outperform high beta EM and commodity currencies as USD rallies, given the ECB's inability to combat global disinflationary forces. In this environment, falling inflation expectations increase real yields as nominal yields are difficult to push lower with much of the yield curve negative. We believe that EUR is still likely to be negatively impacted by political developments in the future with Brexit a potential catalyst in the near term.
GBP: Looking Beyond Brexit. Bearish.
In the short term, we expect GBP to continue to come under selling pressure due to Brexit uncertainty, as the polls indicate a close race between the Remain and Leave camps and we think little of this has been priced in. Looking beyond Brexit, the UK economy is also showing signs of fatigue, as evidenced by the weak manufacturing numbers recently and the BoE's downward revision of its GDP forecast. As such, we expect nominal yields to work against the GBP and like selling GBP against USD.
CAD: Stay Short CAD. Bearish
Data in Canada continued to disappoint this week with a poor capex intentions survey pointing to a large investment drag from energy and manufacturing in 2016. This follows last week's poor trade data which showed non-commodity export volumes falling an additional 2% in March after their nearly 5% fall in Feb., reversing all the improvement since 3Q15 and raising serious doubts about the chance for an export-led recovery. These factors, in addition to CAD's strong appreciation and production taken offline due to the tragic wildfires, pose large downside risks to 2Q growth and increase the probability that the BoC starts discussing downside risks to the outlook. We like short CAD positions.
AUD: Commodities Drag. Bearish.
The recent sharp fall in iron ore and rebar prices have shown that commodity prices are overstretched due to speculative activity and more correction can come, which will weigh on the AUD. The rebalancing of Australia's economy from the highly paid mining sector to lower-paying services sector have reduced wages and inflation expectations, paving the way for more rate cuts by the RBA. We stay bearish on AUD and like selling against JPY and USD.
NZD: Looking to Sell. Bearish.
We like selling NZD in this current USD rally as we expect high carry commodity currencies to underperform. NZD has benefited in recent days as the RBNZ's financial stability report pointed to rising house prices as a risk and pointed to the possibility of more macroprudential policies. While this, along with some better than expected data, has caused the market to price out the probability of RBNZ cuts, we expect this to reverse. The NZD TWI remains too high and with our expectation for commodity prices to fall as well as the RBA's recent dovish turn, we believe the RBNZ will stay dovish and limit currency strength.
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