A roundup of the latest FX insights from leading financial institutions.
Credit Agricole on Global Currencies: Valentin Marinov, Head of G10 FX Strategy
Valentin Marinov from Credit Agricole evaluates FX carry trades by ranking G10 currencies' yield appeal, identifying USD, NZD, and GBP as top-yielders and JPY, CHF, and EUR as lowest.
Sustainability hinges on future rate cut expectations, with NZD showing the most enduring rate advantage due to the RBNZ's conservative cut strategy. Conversely, the EUR faces significant rate reductions, whereas JPY might see a relative rate improvement due to divergent ECB and BoJ policies.
Key quotes:
"In G10, the three top-yielding currencies are the USD, the NZD and the GBP."
"The three lowest-yielding currencies are the JPY, the CHF and, to a lesser degree, the EUR."
"The NZD seems to offer the most durable rate advantage."
"The RBNZ is expected to cut the least aggressively in G10."
"The EUR is expected to suffer the biggest rate loss."
"The JPY could even regain some rate advantage due to diverging ECB and BoJ policy outlooks."
B of A Global Research on US Dollar Outlook: Howard Hu, G10 FX Strategist
Howard Du from BofA Global Research notes the USD's correlation with US real yields is at a near two-decade peak, suggesting the USD rally could wane, reinforcing a bearish outlook by year-end.
Key quotes:
"USD correlation to US real yield is currently sitting close to a two-decade high."
"Causality of real yields on FX tends to rise amid Fed policy pivots."
"The recent USD rally...may lose steam with USD bears becoming reinvigorated, should lower real yield materialize."
"We stick with our broadly bearish USD year-end forecasts."
ING on Pound Sterling: Francesco Pesole, FX Strategist at ING Bank
Francesco Pesole at ING observes a rise in UK growth expectations, with PMIs climbing in February. Unlike the ECB, the BoE benefits from letting data guide market perceptions without necessitating hawkish commentary.
Recent statements by BoE officials, including Governor Bailey and MPC members Broadbent and Dhingra, suggest an openness to easing, highlighting the risk of overtightening.
While the Euro to Pound exchange rate (EUR/GBP) rebound from its low wasn't unexpected, further near-term gains may be limited as market adjustments focus more on the ECB than the BoE.
Key quotes:
"The UK has continued to experience some repricing higher in growth expectations."
"Governor Andrew Bailey endorsed expectations of easing this year."
"Ben Broadbent and Swati Dhingra said easing is likely and that there is a risk of overtightening."
"The rebound in EUR/GBP from the excessively cheap 0.8500 low did not surprise us."
"Markets may be more inclined to push 2024 ECB easing expectations back to 100bp."
"Our medium-term view remains bullish on the pair on the back of policy."
MUFG on Pound Sterling Outlook: Derek Halpenny, Head of Research, Global Markets EMEA & International Securities at MUFG
Derek Halpenny from MUFG highlights an optimistic shift in the UK's economic landscape, with the technical recession from last year's second half likely concluding.
February's preliminary Composite PMI data suggests a potential Q1 GDP growth between 0.2% and 0.3%.
However, rising input and output prices could prompt the BoE to delay rate cuts while monitoring potential supply constraints.
BoE MPC member Megan Greene's hesitation to cut rates, citing entrenched inflation concerns, aligns with a global trend of central bank caution.
Despite positive signals, lingering growth worries and consumer confidence dips, alongside slightly rising mortgage rates, may be tempering GBP gains.
Key quotes:
"The UK Composite PMI increased modestly further in the preliminary data for February."
"S&P Global Market Intelligence stated that the PMI reading is signalling GDP expansion of 0.2% to 0.3% in Q1."
"The data also revealed some signs of upward pressure on prices again."
"The data will only encourage the BoE to hold off and assess factors like shipping container traffic."
"Megan Greene...stated that she was not in a position to vote for a rate cut."
"The upturn in risk sentiment globally will certainly allow the BoE to remain patient."
"The first cut is fully priced for August in the UK."
Westpac on Australian Dollar Forecast: Sean Callow, Senior currency strategist at Westpac
Sean Callow from Westpac notes the AUD's recovery from recent lows, suggesting a waning momentum in the US dollar's rally.
He anticipates a slight upward trend in the short term, influenced by potential actions from Chinese authorities and significant Australian mining earnings.
However, resistance at 0.6625 could limit gains, with broader US economic strength, a neutral RBA stance, and minimal long-term impact from China's stock market expected to maintain current trends.
Westpac forecasts notable Australian Dollar (AUD) demand this week but remains cautious about the currency's medium-term direction.
Key quotes:
"AUD has fully retraced its slide to a low of 0.6443 on last week’s US CPI data."
"This recovery hints at tiredness in this year’s US dollar rebound."
"We continue to expect a mild upward bias near term."
"China’s National People’s Congress looms on 5 March."
"Westpac estimates this week’s AUD demand around A$4.8bn."
"Still, 0.6625 resistance may cap gains."
"Multi-week, we see potential for AUD/USD to test the 0.6350/0.6400 area."
Further insights to follow...