GBP the preferred short, JPY the favoured long - Westpac

Research Team at Westpac, suggests that GBP has slipped down in their rankings, becoming their favoured short while at the other end of the spectrum JPY replaces NZD as their favoured long.

Key Quotes

“JPY is now our highest conviction long, replacing NZD, the latter holding less appeal now that the RBNZ has firmly repeated that further easing “will be required” and with the recovery in dairy prices showing signs of stalling. On JPY, while impressed by the flexibility the BoJ awarded itself in terms of monthly asset purchases, the key takeaway is that the BoJ will more than likely buy less JGBs on a regular basis and thus execute less QE. That it has done so in a way that implies limited risks of a JGBs sell-off is a master stroke. However, once markets observe early signs of tapering we expect some further strength in ¥. We sell USD/JPY at 102.75, stop 103.90.

Our macro score for GBP has not changed. The prospect of what Brexit means - hard or soft - is undermining confidence as evidenced by weaker recent surveys, notably BoE’s agent survey on investment intensions. This will dampen any GBP squeezes and the continuation of BoE accommodation should drive GBP lower. Our technical bias remains negative too - even though rising support in the low 1.29’s has effectively held a squeeze above 1.3150 is needed to turn daily momentum. The key shift comes from our model, which, having turned bullish after the brief run of stronger survey data has called it quits. Stronger data will only get one so far with the model - higher yields must eventually be part of the story but Gilt-Tsy spreads have held stubbornly GBP negative. Despite the negative overall score it does not exceed our threshold to sell GBP on strength.”