FX on the threshold of central banks’ easing

The Federal Reserve (Fed) is about to embark on its first interest rate-cutting cycle since 2007. Valuation, historical precedents, slowing US growth due to the maturity of the cycle and the waning impact of fiscal stimulus, as well as the build-up of the twin deficit all argue for USD weakness. However, dollar depreciation is likely to be moderate as other major central banks will maintain their recently adopted dovish stance. Only once global growth and trade stabilise will dollar losses accelerate.

We maintain our cautious stance on EURUSD, forecasting a modest spot gain towards 1.15 by year-end. We remain neutrally positioned, as expected spot returns are not enough to offset the negative carry on a risk-adjusted basis. At the same time, we believe that the recent CHF strength will run out of steam. With deteriorating domestic dynamics and absent any evidence of inflation pick-up, the Swiss National Bank will maintain (and possibly step up) its dovish stance.

We continue to see GBP risks skewed to the downside in the near term, due to elevated UK risk premia associated with Brexit. Assuming an eventual soft Brexit (although admittedly a scenario with somewhat lower probability than before), sterling should recover. This, however, will likely be a story for 2020.

We maintain a bullish JPY view due to Fed easing, late-cycle dynamics, trade-related uncertainties, and undervaluation. However, the market is no longer short, which suggests that USDJPY downside may be less intense than before.

On China, the latest batch of June data reinforces our call for relative CNY stability for the time being, and some mild USDCNY depreciation further out. The hurdle for yuan devaluation remains very high, in our view.

On the Nordics, we reiterate our bullish NOK view, but see some downside risks to our year-end forecasts. We remain constructive on NOKSEK.

Finally, we still see monetary policy expectations as too loose in Australia and Canada, and expect that AUD and CAD will make some further moderate headway.

Read our detailed analysis here