1Finance

"USD: EM and G10 Divergence. Bullish.
We remain USD bulls but recognize that USD could see some correction against EUR in the near term as European yields head higher on the back of reflationary signs. This could spill over to mild weakness against other G10, but we remain bullish against EM. Higher volatility will reduce the attraction of EM carry, particularly as core yields rise across the board, narrowing interest rate differentials. In the medium term, we still expect USD to be a broad outperformer.

EUR: Draghi Gives EUR Legs. Bearish.
The ECB did not push back against higher yields in the Euro Area, which could offer some near term support to EUR on the crosses. Should risk appetite fade, this could bolster EUR even further, as many European equity holdings are currency hedged, and therefore short EUR positions would need to be bought back as equities were sold. Once this positioning becomes clearer, we would look to sell EUR, as our medium term view on EUR has not changed.



JPY: Weakness Largely Behind Us. Neutral.
We believe the majority of JPY weakness is likely behind us, though USDJPY could trend slowly higher. Japan yields have been dragged higher alongside European yields, limiting the extent of yield differentials which could send JPY lower. The break of 125 could drive a larger move higher, but with wage growth remaining strong, we believe that JPY is more likely to remain range bound in the near term.



GBP: Sell on Rebounds. Neutral.
Driven more from the USD side of the equation, we like selling GBPUSD on rebounds. The currency pair continues to be sensitive to data. In particular when Services PMI headline was weak, the underlying details showed signs of strength in the labour market – however GBPUSD fell on the day. The same is with the US side, where we watch for the hard data. There are near-term upside risks associated with our bearish EURGBP view given the volatility seen from the EUR side of the equation.



AUD: RBA Cuts Not Priced.
We remain bearish on AUD but would wait for better levels before selling. First, as EUR regains some ground, G10 currencies across the board could see support against USD in sympathy. Second, the RBA sounded less dovish at its latest meeting, and GDP was stronger than expected. Both of these increase our reluctance to add to AUD short positions here. That said we maintain our medium term bearish view as lower commodity currencies have a second round impact."




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