Forex Institutional Research: BNPP FX Weekly

Forex Institutional Research: BNPP FX Weekly

Key quotes from the report: 

BNPP FX Weekly USD recovery is likely short-lived

BNPP FX Weekly An improvement in the risk environment helped the USD rebound vs low-yielding currencies, with USDJPY trading around 114 and EURUSD breaking below 1.11. The stabilization of credit and equity markets has taken the pressure off of current account deficit currencies, which all suffered in early February. However, we would be cautious about extrapolating this week’s price action going forward and anticipate the USD reaching new 2016 lows vs the EUR and JPY before managing a more sustained recovery (see article inside), in line with our updated forecasts published last Friday.

FED Rate Hike Expectation Unlikely To Recover Quickly

“Key to this view is our observation that this recovery in risk sentiment owes in large part to the collapse in market pricing for further Fed hikes and also reflects reduced pricing for CNY devaluation, as the USD has retreated. For this reason, we do not expect the markets to rebuild Fed rate hike expectations, and front-end rates are likely to stay low. Moreover, we expect the risk environment to remain quite challenged as we move through Q1, leaving current account surplus currencies well-supported at the expense of deficit-backed currencies”

Commodity Currencies To Give Back Gains

“Consistent with this, we also remain inclined to fade the recovery in commodity exporter currencies of the past few days. While crude prices have rebounded off very low levels, we do not expect a rapid recovery in commodity prices to levels that will materially affect the economic outlook for these countries. Central banks in these economies continue to have scope to ease policy further and the markets have room to increase pricing for lower rates”

SEK and GBP To Under Perform EUR

“We see scope for near-term rebounds in the SEK and GBP relative to the EUR, as the markets prepare for further aggressive ECB easing. While the path to a GBP recovery is complicated by the EU negotiations now underway in Brussels, we are positioned for an eventual break lower in EURGBP via derivatives recommendations. We now feel the risk-reward is more attractive for shorting EURSEK and recommended short positions this week”

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