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USD. USD Correction Largely Over. Bullish.
We believe the current USD correction is largely over and expect more USD strength, particularly against the low yielders. Yellen’s speech was important as it indicated Yellen was one of the median SEP dots supporting three rate hikes, keeping US front end rate expectations supported. In addition, US data has continued to come in on the strong side this week, with better jobless claims and inflation figures. Trump’s comments inject some uncertainty but, as we note in the overview, we don’t think this will change the appreciation trend of USD. We expect reflationary themes to push USD higher from these levels.
EUR: Dovish ECB. Bearish.
The ECB retained its dovish language in the latest meeting, even though there are signs of rising inflation in some EMU countries. President Draghi suggesting that policy should be tightened only when inflation is sustained and euro-area wide, implies that the ECB may remain accommodative for some time, given the wide divergence between the core and periphery economies. This will keep EMU nominal yields relatively low, and as global and EMU inflation rises, real yields will decline, weakening the EUR. We remain short EUR/USD.*
GBP: Tactical Short-Covering Rally. Bullish.
We think there is potential for GBP/USD to rally back to 1.27/1.28 before moving lower again towards our quarterend target of 1.17. We think the key takeaway from PM May’s speech was that either the UK will have access to the single market or the business model will be changed, both of which we see as GBP-supportive in the short term. The market is still short GBP, suggesting that there is room for positioning adjustment to lift the currency. This week, the main events to watch are the Supreme Court ruling and GDP.
CHF: Driven by Global Risk. Neutral.
The SNB’s Jordan commenting that negative rates are necessary and have worked well in Switzerland suggests that negative rates are here to stay for some time and the central bank is unlikely to change policy anytime soon. Therefore, USDCHF is likely to remain driven predominantly by the USD leg, and is likely to have more upside on real yield differentials. The key event that will affect global risk and CHF this week is President-elect Trump’s inauguration speech. If global risk appetite weakens, CHF is likely to benefit from safe haven demand.
CAD: Turning Bearish CAD. Bearish.
We are turning bearish on CAD as we think yesterday’s BoC meeting was a game changer for the near-term CAD trajectory. The BoC followed its moderately dovish statement and MPR with an even more dovish press conference, which emphasized the limited positive impact from US fiscal stimulus and the still-challenging Canadian economic outlook. With its projections for the output gap closure to not be until mid-2018, it seems hard to justify the market still pricing 10bps of hikes this year. With the BoC dovish, increasing worries over NAFTA and the market still long CAD, we expect CAD to weaken as rates markets price at least a flat curve over 2017. We have entered a long USDCAD trade on the back of this change in view.*
AUD: Waiting for better levels to sell. Neutral.
AUD has continued to perform well and despite our bearish medium-term view, we are waiting for better levels to sell. In addition, commodity prices such as iron ore and other metals continue to rally, allowing AUDUSD to break out of the top end of a long held channel at 0.74. With USD rising, AUD may stop its upward trajectory but we are still waiting for catalysts on the domestic or external side (namely China) to enter short positions. Longer term, we see the RBA becoming more dovish and even cutting rates as the economy’s overreliance on trade with China and its overextended housing market may start to reduce consumption.
NZD: USD Drives NZDUSD Pair. Neutral.
We still see the NZD outperforming the AUD over the medium term and closed our trade last week on the back of AUD’s aggressive short-term rally. Generally NZDUSD has been driven by the USD side of the pair lately with less focus on domestic development but this week’s CPI print will be important. Inflation is expected to bounce back to its highest YoY level in almost two years, which would help confirm the current pricing of the one hike by the RBNZ over the next year.