Focus of the day:

"Longer term, we have been of the view that persistent policy divergence and unexceptional USD valuations allow room for still more losses for EURUSD and gains for USDCHF, especially as CHF remains overvalued . As such, our strategic trades like 28 Apr 16 expiry USDCHF 1.05 digital calls are not impacted by these events.

e-Institutional Views

Shorter term, our European economists and rate strategists see a chance that the ECB beats market expectations for easing, for example by lifting the condition preventing it from buying bonds with yields below its deposit rate. Conversely, our US team still feels the market is capable of pricing in more Fed hikes than currently priced.

This still leaves room for greater divergence to be priced in, suggesting that it is too soon to take profits on short EURUSD or long USDCHF trades. It is enough to look at the still-stretched EURUSD basis market to see that USD funding is stretched beyond what a simple rise in USD OIS and Libor rates would imply. This usually creates asymmetry in favor of extended USD rallies.

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