Major Bank Daily Analysis & Insights
SEB
The focus of USD investors will be on this week’s FOMC
minutes from May meeting (Wed).
SEB Research interpreted the May FOMC statement as being
slightly hawkish and expects the Fed to hike in June and will look in the
minutes for indications about how certain Fed was that the Q1 weakness was
temporary and any discussions of fiscal policy.
“Arguably, the most interesting aspect of May minutes would
be details about balance sheet normalization. We will be looking for
indications of expected start time, the appropriate future size if the balance
sheet, and the pace of reduction.
Another interesting issue is the possibility of ourright
sales of mortage backed securities (MBS). At this point, we expect that
reduction in the balance sheet will begin in December 2017. Some rough estimate
suggest that the rate of reduction could be around 20bn per month,
corresponding to any policy rate hike per year. However, any details in the
minutes could result in a revision of our estimates,” SEB adds.
Danske
Danske Banks FX Strategy Research notes that EUR/USD has
moved very far, very rapidly in a very short period on the ongoing accelerated
repricing of both Europe and the US.
“The difference in the economic surprise indices between the
Eurozone and the US is at the highest level since spring 2015 and PMIs in the Eurozone
have been marching higher consistently since September 2016, while the cycle in
China and the US is faltering. Eventually, there will be a spill-over from the
IP cycle in China and US into the Eurozone as there always is, but for now, the
Eurozone is shining,” Danske clarifies.
In line with this view, Danske is envisaging the beginning
of the end of the USD’s multi year bull run, and remains structurally bullish
on EUR/USD.
“In the medium to long term, we remain bullish on EUR/USD as
fundamentals such as valuation and current account balances suggest a much
higher EUR/USD over time,” Danske argues.
UOB
EUR/USD: Bullish: Still bullish bot odds for extension to
1.13 are not high.
Merkel’s “EUR is too weak” comment boosted EUR to a high of
1.1263. While this has improved the upward momentum, the bullish phase that
started last Wednesday, 17 May still appears to be over extended and the
extension target of 1.13 may not be seen so soon. We have suggested taking
partial profit at 1.117 last Friday and those remaining longs should adjust the
stop loss higher to 1.113 from 1.1095 yesterday. Looking further ahead, any
break above 1.13 would shift the focus to 1.1365.
GBP/USD: Neutral: In a 1.285/1.305 range
There is not much to add as
GBP rebounded quickly last Friday to hit a high of 1.304, holding just below
the top end of our expected 1.285/1.305 consolidation range. While the
undertone has improved, it is not enough to shift the current neutral outlook to
bullish. That said, an intraday move above 1.305 is not ruled out but GBP has
to register a NY close above 1.3085 to indicate the start of a bullish phase.
AUD/USD: Shift from neutral to bullish: Immediate target of
0.756
We have held the same view since last Tuesday, 16 May
wherein we expected the recovery from the 0.733 low to extend higher to
0.748/85. AUD hit a high of 0.7489 yesterday before closing on a strong note.
The outlook for this pair has shifted to bullish with an immediate target of
0.756. In order to maintain current momentum, any short term pullback should
not move below 0.743.
NZD/USD: Shift from neutral to bullish: Immediate target of
0.705/55
While we highlighted the improvement in upward momentum
yesterday and noted that “a daily closing above 0.697 would indicate that a
move towards 0.705/55 has started”, the sudden and strong surge higher came as
a surprise. The outlook has clearly shifted to bullish and the immediate target
is at last month’s peak near 0.705/55. Based on the rapid acceleration, a move
beyond this level would not be surprising and would shift the focus to 0.709.
USD/JPY: Bearish: Diminished odds for further USD weakness.
USD traded mostly sideways over the last couple of days and
downward momentum is beginning to show signs of waning. That said, until 111.9
is taken out, another push lower towards 110.1 is not rules out but based on
the recent price action, the odds for such a move have diminished. Those who
are short should consider taking partial profit on any approach near to 110.1.
SocGen
SocGen FX Strategy Research notes that NZD, AUD and CAD are
in the process of tracing out gradual turns against the US dollar.
“Anticipation of a higher milk price forecast from Fonterra
this Thursday, and hope of tax buts on Thursday when a bigger budget surplus is
expected to be announced in New Zealand, are boosting NZD which is dragging AUD
along behind it; CAD is following at a respectable distance behind,” SocGen
notes.
“Cad is more sensitive to oil than the others, and the
recent bounce reflects optimism about the upcoming OPEC announcement,” SocGen
Adds.
Strategy wise, SocGen thinks that AUD/JPY and NZD/JPY are
both attractive longs here, but for a very short term trade, NZD/JPY is the one
with most gain from Thursday’s Budget.
ING
ING FX Strategy Research notes that geopolitics may be
greater driver of CHF this week as G7 leaders meet in Italy.
“EUR/CHF stalled below 1.1. Our preference is that this
continues to edge higher as investors contemplate a subtle change ECB language
at the June 8th meeting and investors correct underweight EUR
positions,” ING argues.
ING targets EUR/CHF at 1.11 in 1 month.
Barclays
Barclays Capital Research expects the Boc to leave it’s
overnight rate target unchanged at 0.5% on Wednesday.
“The Boc statement is likely to acknowledge the risks coming
from household debt and the housing markets, highlighting the idiosyncratic
nature of recent events and a lack, for now, of any systemic downturn, in line
with Poloz’s recent speeches, the continues slack in the economy, dismal wage
growth and below target core inflation will be reiterated, and the BoC is
likely to keep it’s neutral to dovish tone. With little change In the ststement
expected and the absence of a press conference. The Boc this week should be a
non-event,” Barclays adds.
However, Barclays expects the main driver for CAD, beyond
sentiment surrounding the USD and US politics, will be the outcome of the OPEC
meeting on May 25.
“Oil prices could be supported by the confirmation of a
finalized agreement, but the upside likely to be limited. A more aggressive
production cut in the near term (because of longer duration of cuts or
increased compliance) poses downside risks for oil prices in 2018 as non-OPEC
supply picks up,” Barclays argues.
BofAML
BofAML Research expects the BoC to remain on hold in its 24
May meeting.
“We see the BoC on hold in May with a neutral statement as
growth and inflation diverge. We expect BoC to hike in 1Q18,” BofAML adds.
On the CAD front, BofAML argues that the BoC’s likelihood of
staying on hold in May with a neutral statement as growth and inflation
diverge. We expect BoC to hike in 1Q18,” BofAML adds.
On the CAD front, BofAML argues that the BOC’s likelihood of
staying on hold this year should continue to be supportive of BofAML’s overall
negative view on CAD, with modest smaller upside for USD/CAD.
“This stance is against recent market moves, where CAD has
rallied a bit on the back of oil prices in past days. However, we continue to
look for CAD to sell off modestly to 1.39 by the end of the year, primarily
because we still look for interest rate differentials to imply a higher USD.
At present, we would see CAD as around 3-5% overvalued combining
the information from both rates and commodities markets,” BofAML argues.
CIBC
CIBC Research expects the BOC to stay on hold at its policy
meeting on Wednesday, and to stress the policy divergence between Canada and
the US.
“The BoC already had bullish forecasts for near term growth,
so there is no need to hint any changes to those projections in this non-MPR
statement. Expect Poloz to continue stressing the differences between Canada
and the US as he keeps interest rates on hold,
In this week’s statement Poloz will likely once again alert
investors to differences between the US and Canadian economies, explaining why
rates here remain on hold while the US hikes,” CIBC argues.
On Cad front, CIBC expects only a modest CAD appreciation,
with USD/CAD reaching 1.34 by year end but with CAD underperforms.
BTMU
BTMU FX Strategy Research note that the latest IMM report revealed
that speculators are beginning to buy into the outlook for a stronger euro
during the rest of this year.
“In recent weeks, speculators have built net long euro
positioning for the first time in 3 years. In the latest reported week, the net
long positions even reached their highest level since the end of October 2013.
The breakdown of positioning reveals that it has been driven
both by Asset manager/ institutional investors building up long euro positions
and leveraged funds paring back short euro positioning,” BTMU adds.
“The recent euro rally has not yet been fully embraced by the
market leaving scope for further upside in the near term even if the current
spot rate already appears to be running a little ahead of our short term model
valuation estimate,” BTMU argues.
Morgan Stanley
“The rise of the EUR has nothing to do with yield, but a lot
to do with cheap asset valuations and increasing signs of the Franco-German
reform engine working again.
Bundesbank’s Weidmann calling the current ECB policy appropriate
suggests investors should not expect too much from 8June ECB meeting,” MS
argues.
“EURUSD remains a buy the dip”, MS advises.
In line with this view, MS runs a limit order buy EUR/USD at
1.103 targetting 1.18.
Credit Agricole
CACIB FX Strategy Research notes that the recent EUR/USD
rally stands in sharp contrast with the muted widening of the EURUSD 2Y rate
spread.
In addition, CACIB notes that EUR/USD rebound is running
ahead of the gradual tightening in the OAT Bund 10 Y yield spread that has been
evident since the French Presidential elections.
On the flows front, CACIB notes that investors have built
considerable EUR longs in anticipation of portfolio inflows into Eurozone stock
markets and unwinding of EUR funded carry trades as the ECb moves ever closer
to the QE taper.
“We doubt that these inflows can boost EUR, however, so long
as they are hedged,” CACIB argues.
On the USD front, CACIB also notes that USD has sold off in
excess of the recent correction lower in FED rate hike expectations.
“We expect the US growth outlook to improve, political risks
to subside and the FOMC to maintain it’s outlook for further monetary policy
tightening, helping USD to recover,” CACIB adds.
On the valuation front, CACIB estimates of short term fair
value for EUR/USD suggests that the pair should be trading well below 1.08 at
present.
All in all, CACIB advises caution on the near-term outlook
for EUR/USD.
Citi
Citi Research expects the BOC to keep interest rate
unchanged at it’s policy meeting on Wednesday.
“If the BOC says to use other property market measures to
solve the housing issue instead of interest rate policy, CAD may be
underpinned,” Citi argues.
In addition, Citi also notes that CAD investors will focus
on the outcome of the OPEC meeting on Thursday.
“OPEC may extend output cut deal by 9 months this week,
which may support oil prices and underpin CAD,” Citi adds.
NAB
“A june hike still looks like the base scenario, but if
there are any signs of doubts over the expected upward path on inflation this
view may be challenged.
After dipping into the mid 60s last week, pricing
expectations for a June hike have edged higher again and currently sit at 75%
while 35bps of tightening are priced by year end,” NAB adds.
In addition, NAB thinks that any commentary surrounding the
Fed Balance Sheet to be limited to the Committee’s preference for a passive
strategy without any details on timing or magnitude.
Nomura
“We see scope for continued oil price support if an
extension is agreed o, and think oil prices have a few more months of positive
narrative before US production concrns resurface,” Nomura argues.
“We remain comfortable holding our long NOK and CAD
positions around this event.”
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