Forex Institutional Research: BNPP FX Daily
Key quotes from the BNPP FX report:
The US Federal Open Market Committee made only minor changes to its policy statement this week, leaving its forward guidance on rates unchanged. The statement signalled a reduction in concerns over the external environment but acknowledged that, overall, activity and household spending appear to have moderated. In our view, the Fed’s steady policy, even as the risk environment and inflation expectations improve, leaves the USD vulnerable versus the funding currencies. We remain long EURUSD targeting a move to 1.16.
At its policy meeting, the BoJ kept interest rates and its target for the annual expansion of the monetary base unchanged, in line with our economists’ expectation. We see scope for the sell-off in USDJPY to extend in the near term. In our view, as expectations of further JPY weakness continue to dissipate, any rallies in USDJPY are likely to meet with selling interest from domestic Japanese investors increasingly looking to buy JPY on weakness to hedge their foreign currency exposure. However, our economists expect the BoJ to ease policy further at its June meeting, cutting its interest on excess reserves rate by a further 20bp. We continue to expect EURJPY to rise, as the difference in performance between the two structurally similar currencies looks overdone. We remain long the cross via options.
The Reserve Bank of Australia (RBA) will hold its policy meeting on Tuesday (3 May). Australian Q1 CPI inflation surprised significantly to the downside this week, posting its weakest reading since 2008. In response, rates markets are now pricing in an almost 50% probability of a policy rate cut at Tuesday’s meeting. Furthermore, BNP Paribas FX Positioning Analysis suggests AUD long positions remain high on a historical basis and thus there is scope for them to be unwound further. We remain long EURAUD via options. The GBP has been trading with a firmer tone this week. While the April UK services PMI next Thursday (5 May) is unlikely to revive expectations of a Bank of England rate hike, we see scope for GBP short positions to be cut further from their current extended level.
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