Yen in favour
The uncertain risk backdrop should see the Japanese yen outperform across the board and we expect a continuation of the dovish re-pricing in open economies. It looks too early to re-buy into emerging markets FX. The motives for the Chinese reneging on its part of the trade deal are uncertain at this stage. Are they prompted by a little ‘fine-tuning’ or a more fundamental re-assessment of Trump’s tolerance for a total trade war? Until this becomes clearer we expect investors, who have so far enjoyed a strong year of returns, to turn more cautious. With its negative correlation to equities and its lack of correlation with the renminbi, we expect the Japanese yen to perform well over the near term. We favour the JPY over the dollar, as the latter could prove a little vulnerable if US equity markets were to correct.
Risks to the euro
We still think there is a window for EUR/USD to trade to 1.10 this summer. The renewed trade conflict risks stamping on the green shoots of the eurozone recovery. US tariffs on auto imports and European elections pose two further risks to the euro in May.
Central and eastern Europe re-assessed
Elsewhere, we expect positive trends in CE4 FX to be re-assessed. A poor performance by the ruling PiS in European elections could raise fears of fiscal profligacy in Poland. Hungarian rates look far too low given near 4% CPI. We think the bull trend in the Czech koruna will reverse now that the hiking cycle is over. And the Romanian leu looks to be living on borrowed time.
You can read the full report here.