Forex Insider Daily Update 2 June 2017

Major Bank Daily Position

AUD/USD - Credit Suisse - LONG Position - From 0.7435 - Stopped out at 0.7380 (S/T) -55 pips

EUR/GBP - Barclays - SHORT Stop Order - Filled - Entry: 0.8710 - Target: 0.8314, Stop: 0.8854 (M/T)

EUR/JPY - Morgan Stanley - LONG Position - From 125.15 - Closed at 125.15 (TOTW-M/T) ±0 pips

Major Bank Daily Analysis & Insights

SocGen

SocGen recommends building long positions in EUR/USD via buy dips through summer while sees long USD/JPY as a good buy around current levels.

“The gap between EUR/USD and IR differential remains worrying large and along with positioning data and options pricing that imply the market is collectively long and bullish of the euro here, argues for wariness. Yet, EUR/USD is testing the year’s highs and frustrating anyone looking for a dip to buy. EUR/USD is likely to spike a fair bit higher in due course.”

On that basis, USD/JPY is a decent risk reward buy with TIIPS at 38bp. There is major support at 30bp or so, 8bp from here and more upside than that is the recent soggy trend to US data does not continue.

SEB

SEC expects the ECb to raise its deposit rate in December, which should also support the currency. However SEB argues that as inflation outlook is not secured long term near target, ECB will also guard against too strong euro by intervening verbally near 1.15.

L/T outlook: Can the rally be sustained?

“As the trade weighted euro is close to its historical average and the Eurozone still faces political risk premiums and large internal imbalances, the potential for a continues rally is limited.

For the euro to trade well above its average rate and long term fair value would require:

1.       Stronger fiscal collaboration within the Eurozone.

2.       Internal imbalances in the Eurozone decreasing likely boosting domestic spending

3.       ECB starting to raise its refi rate/stop QE

None is expected in the next 6-12 months.

BofAML

It will depend on the timing and pace of Fed hikes and ECB QE tapering in the months ahead, as well as if what kind of tax reform we will see in the US. The new Fed appointments and particularly the possible Yellen replacement suggest uncertainity for EURUSD.

Trading EURUSD has been frustrating and we expect this continue being the case for now.

Instead, BofAML reiterate its view for more upside in EUR/JPY in the months ahead as monetary policies diverge and targets the pair at 131 this year.

Credit Agricole

CACIB expects the conservativesto extend their parliamentary majority as a result of the 8 June Election, strengthening PM May’s position ahead of the Brexit negotiations.

“Median polls since the election was called have pointed to gains in excess of 70-80 seats. Confirmation of that could help GBP revisit its recent highs against both USD and EUR.

However, in the very near-term, CACIB remains cautious In its short term GBP outlook, citing a non negligible risk that the Conservatives may fail to meaningfully extend their majority.

Beyond the Uk elections, CACIB expects the UK economic outlook to deteriorate from here, keeping BOE’s easing stance firm in place and continue to weigh GBP.

ANZ

ANZ notes that growing expectations that the ECB forward guidance will be upgraded amid a broadening recovery and receding deflation risks have support EUR recently.

In that regard, ANZ has become more constructive on the near term prospects for the EUR as political risk has shifted from the euro to US.

However, ANZ does not think that in the long term, the condition for a sustained bull market in EUR/USD are in place.

Over time, the US remains well advanced in the business cycle and inflation is honing on target. We do expect some fiscal expansion and the Fed Is gradually normalizing policy. In addition, the ECB is not tightening and euro area inflation is still exceptionally low.

In line with this view, ANZ targets EUR/USD at 1.15 by September before trading back around 1.1 into the first quarter of 2018.

Barclays

Barclays argues that the EUR bull case relies too heavily on 3 pillars that have shaky foundations.

Expectations for EURUSD to break out of its range to the topside rely on a combination of some arguments:

1.       EU political risks have receded, return markets to focus on economic fundamentals

2.       Those fundamentals, continuous improvements and upside surprises in eu economic indicators have set the stage for a significant asset allocation shift to euro area equities

3.       Those factors also likely will lead to more rapid ECB policy normalization

“We see problems, we believe EUR rally will quickly fade, reinforcing recent trading ranges and opening up tactical downside in EURUSD.”

In line with this view, Barclays expect EUR/USD to trade in a 1.06 – 1.12 range.