“EUR/USD to hit a low of 0.98 in 2Q16 driven by rock-bottom EUR money market rates and the short-end of the US curve reacting to higher US inflation. However, this may well prove to be the grand finale of the multi-year EUR/USD bear trend. We look for a sharp reversal towards 1.10 by 4Q16 triggered by the ECB re-pricing.
Despite the prospect of two BoE rate hikes in 2016, we see GBP/USD vulnerable to 1.40 in 2Q16. This period should embody risk premia for both a possible 3Q16 Brexit referendum and GBP’s typical underperformance in a fragile risk environment.
USD/JPY looks unlikely to sustain a move above 125 this year. The JPY is extremely undervalued on our models and the fast-growing current account surplus is providing strong insulation. Expect JPY again to be the preferred global safe-haven.
EUR/CHF to remain fragile in our opinion. SNB’s threat of continued FX intervention to resist CHF appreciation looks empty. Lower EUR rates, a more difficult risk environment and more de-leveraging from Swiss banks favours 1.05.
We are turning bullish on SEK and NOK, calling an end to their two-year sell-off SEK should benefit from the fading involvement of the Riksbank as inflation picks up, while NOK is extremely cheap and oversold – with plenty of bad news priced in.
Enduring headwinds will see further declines in CAD, NZD and AUD versus the USD. Front-loaded CAD and NZD weakness will give way to a fundamental 2H16 recovery; AUD downside will be more protracted. Short AUD/USD is a top trade for 2016.”
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