Focus of the day:
USD: Don’t Forget About the Fed. Neutral.
We see scope for USD to remain supported against most currencies in G10. Data over the past week has been strong, most notably consumer confidence. At the same time, the market has pushed back the timing of the first Fed hike due to uncertainty in Greece. We see scope for this to come forward on the back of a resolution in Greece in either direction, offering support to USD.
EUR: Markets Waiting for Greece. Bearish.
We believe there is little scope for EUR to rally, regardless of the outcome in Greece. A ‘No’ vote in the referendum is likely to lead to Greece exit from the euro over time. The ECB may well have to undertake aggressive action to stabilize markets, and the enhanced liquidity is likely to weigh on the currency. On the other hand, a ‘Yes’ vote without a credible plan for the future, but rather a ‘muddle through’ solution is likely to keep uncertainty high and reduce appetite for eurozone assets.
JPY: Flows Keep JPY Supported. Bullish.
In an environment of soft risk appetite, we think that JPY is likely to be an outperformer. Higher volatility is likely to drive some repatriation flows as well, and we note that portfolio flows have turned more positive. JPY is the most overvalued G10 currency on a PPP basis, supporting our view that there is scope for strength. Stronger data mean the policy tone is changing, and we expect the currency to remain supported.
GBP: Watching Wages. Neutral.
GBP/USD has weakened from Greek risks and weaker-than-expected manufacturing PMI; however, we still see strength in the more important services sector. In particular wages here appear to be picking up which has supported rate expectations in the UK and therefore GBP. We believe there is potential for GBP/USD to reach 1.60 but prefer buying on the crosses, in particular against the NOK where an accommodative central bank highlights the divergences between the two currencies.
CHF: Watching USD/CHF. Bearish.
The SNB announced that it intervened following the Greek referendum announcement. This suggests to us that the SNB is less worried about the level of EUR/CHF and intervened more on the anticipation of rapid CHF strength. While Greek risks remain, the rapid falls in EUR/CHF are likely to be limited. We wait for opportunities to buy USD/CHF as longer term we will start to see the negative economic impact of the stronger currency.