Focus of the day:
USD: USD rally has longer to go. Bullish.
We believe that the Dollar rally has further legs but needs the help of rising long-term US bond yields to see gains against higher-yielding currencies. Non-synchronized growth has allowed US bond yields to remain low for now. We emphasize USD long positions against low-yielding DM currencies: EUR, JPY and CHF. The focus for the market remains whether US data comes in strong, therefore we will be watching the ISM and then non-farm payrolls.
EUR: ECB remains Dovish. Bearish.
We remain bearish on EUR/USD but look to take profit at 1.31. After, we expect a correction higher, where we would look to sell again. We note that our positioning tracker is currently at -6. In the past when it has reached around these levels, there has been a EUR/USD rebound. So with the extreme positioning, we will be watching for any positive data out of the EUR area that could, cause the rebound and provide better levels to sell at. This week the focus will be the ECB and if they sound dovish.
JPY: BoJ Watched. Bearish.
We still like selling the JPY. We believe that the market is not pricing further easing from the BoJ – so if they do act, it could lead to further JPY weakness. Inflation expectations remain low, so the release of the CPI will be key for the market’s expectation of whether the BoJ could act in the coming months. Any other weak data would also raise the probability of October BoJ action and JPY weakness.
GBP: Long on Crosses. Bullish.
We still like GBP on crosses as we believe the BoE is likely to be among the first central banks to hike. Though data has moderated somewhat, it remains at robust levels that should support the currency. In addition, positioning has neutralized, suggesting room for additional longs. That said, we are more cautious on GBP/USD strength in light of the USD rally we expect. We maintain our sell on rallies stance towards GBP/USD, but look to buy GBP on the crosses.
AUD: RBA Watched. Neutral.
The risks for AUD are now starting to become more balanced. Capex numbers strengthened in 2Q, which could provide some support. However declining commodity prices and developments in China add to the downside risks for AUD. We remain of the view that AUD could stay well supported and outperform in the near term relative to other G10 currencies in a benign volatility environment, with a spike in asset-market volatility the key risk for AUD-supportive portfolio inflows.