"USD: Focus on the Fed. Bullish.
With risks from Greece and China diminishing, we believe that the market will once more focus on Fedrate hikes. Despite the first full 25bp hike being priced for the start of next year now, we still reiterate our economists view for a rate hike in December. Therefore we would expect the front end of the market to adjust, bringing the USD higher with it. This week the market will be focusing on the FOMC statement and the release of PCE. We particularly like buying the USD against EM, AUD and CAD.
EUR: Short Positions to Come Back. Bearish.
With uncertainty regarding Greece diminished, we believe that investors will feel more comfortable reinitiating EUR shorts. We like to express short EUR views against GBP using rebound as a selling opportunity. EURVDraghi has reiterated that the ECB stands ready to act if needed, which could be enough to weigh on EUR, particularly if it supports equities, given the inverse relationship between European stocks and EUR. (for more on MS EUR strategy and forecasts, see here).
JPY: Kuroda Dismissing Further. Easing. Neutral.
Comments from BoJ’s Kuroda this week on the dismissal of further easing and achieving a 2% inflation target by 1H16 was met with much skepticism by BoJ board members according to the minutes of the June policy meeting. While we remain bullish on JPY against the commodity currencies, amidst uncertainty over commodity prices, we expect USDJPY and GBPJPY to rise, with the market’s anticipation of central bank rate hikes acting as the main short-term drivers over the coming weeks.
GBP: Lead up to August Inflation Report. Bullish.
A hawkish tilt to Mile’s speech and more members on the MPC believing that the risks are now skewed for higher inflation have provided a boost for rate expectations and therefore for GBP. FX markets may continue to prepare for 3 members potentially voting for a hike so we expect GBP to strengthen in anticipation of the August meeting and inflation report. We continue to expect some support for GBPUSD towards the 1.60 area but prefer the risk reward of selling EURGBP.
AUD: Playing Catch Up. Bearish.
Watch: RBA Stevens. We believe that the AUDNZD rebound has topped out and like to short this pair. Recent weeks have seen the NZD and CAD weaken significantly but we feel the AUD has been left behind and so has room to catch up. Despite stabilization in Asian equity markets, we believe that the AUD should continue to come under pressure as a result of persistently weak commodity prices and the significant terms of trade shock it is facing. In addition, we expect the RBA to remain dovish."