Risk aversion in markets continues to play out, with our technical team now targeting an S&P 500 level near 1600, a 25% peak to trough decline.
From an FX perspective, the key developments are as follows:
1. A growing fear that monetary policy is now "pushing on a string," at least from an FX perspective. EUR and JPY are materially stronger now than levels before ECB chief Draghi hinted at more easing and the BoJ introduction of negative rates in January.
2. An obvious end to the monetary policy divergence trade when looking at rate differentials, as we discussed in depth last week.
Last week our advice was to avoid fading EUR and JPY weakness against the USD.
This week we go further and for the first time in a very long time become outright bullish on both the EUR and JPY on a 3m horizon. We turn bearish on the USD against the EUR and JPY on a 3m horizon for the first time since the structural USD rally started in mid-2014.
More radically, we change our 12m USDJPY forecast to 105. This week's move below 2015 lows around 115.85 makes it more apparent to us that USDJPY seems unwilling to respect any "lines in the sand." And this is in spite of the entire JGB yield curve out to 10 years responding to the BoJ move by trading negative rates. This is problematic given the tremendous amount of foreign asset buying – likely largely unhedged – that Japanese investors have indulged in for the last three years.
How do these developments impact our EURUSD forecast? We are raising our 3m forecast to 1.17, close to the one-year highs posted in August. Like the JPY, the EUR is a funding currency. And like Japanese investors, Europeans have ventured away from home in search of foreign assets. Any unwinding of such flows in a risk-off environment is EUR bullish, especially in light of the euro area's massive 3.0% of GDP current account surplus.
This content has been provided under specific arrangement with eFXnews.
eFXnews is a financial news and information service. Articles and other information distributed in this service and published on this site are provided in general terms and do not take account of or address any individual user's position. To the extent that some of these articles include suggestions as to various possible investment strategies which users might consider, they do so in only general terms without reference to the personal factors which should determine any user's investment decisions to buy or sell a specific security or currency.
The service and the content of this site are provided and distributed on the basis of “AS IS” without warranties of any kind either, express or implied, including without limitations, warranties of title or implied warranties of merchantability or fitness for a particular purpose. eFXnews and its employees, officers, directors, agents, and licensors do not also warrant the accuracy, completeness or timeliness of the information in any of the articles and other information distributed in this service and included on this site, and eFXnews hereby disclaims any such express or implied warranties; and, you hereby acknowledge that use of the service and the content of this site is at you sole risk.
In no event shall eFXnews and its employees, officers, directors, agents, and licensors will be liable to you or any third party or anyone else for any decision made or action taken by you in your reliance on any strategy and/or advice included in any article and other information distributed in this service and published in this site.
Recommended Content
Editors’ Picks
EUR/USD retreats below 1.0700 after US GDP data
EUR/USD came under modest bearish pressure and retreated below 1.0700. Although the US data showed that the economy grew at a softer pace than expected in Q1, strong inflation-related details provided a boost to the USD.
GBP/USD declines below 1.2500 as USD rebounds
GBP/USD declined below 1.2500 and erased the majority of its daily gains with the immediate reaction to the US GDP report. The US economy expanded at a softer pace than expected in Q1 but the price deflator jumped to 3.4% from 1.8%.
Gold drops below $2,320 as US yields shoot higher
Gold lost its traction and turned negative on the day below $2,320 in the American session on Thursday. The benchmark 10-year US Treasury bond yield is up more than 1% on the day above 4.7% after US GDP report, weighing on XAU/USD.
XRP extends its decline, crypto experts comment on Ripple stablecoin and benefits for XRP Ledger
Ripple extends decline to $0.52 on Thursday, wipes out weekly gains. Crypto expert asks Ripple CTO how the stablecoin will benefit the XRP Ledger and native token XRP.
After the US close, it’s the Tokyo CPI
After the US close, it’s the Tokyo CPI, a reliable indicator of the national number and then the BoJ policy announcement. Tokyo CPI ex food and energy in Japan was a rise to 2.90% in March from 2.50%.