FX Talking: Feeling the squeeze

In what should be a difficult period for equity and credit markets, we would expect the dollar to stay strong this summer. After all, we are still at the stage of front-loaded Federal Reserve tightening. Doubts about the end of globalisation and the need for structurally higher interest rates should also maintain FX volatility at its recently elevated level.

In practice, we think this means that EUR/USD can trade a pretty wide range for the rest of the year – perhaps 1.00-1.10 with a downside bias over coming months. USD/JPY gains over 130 may well be harder work now, but GBP looks increasingly vulnerable given that investors still price the Bank of England's Bank Rate well over 2.00% this year.

Elsewhere in Europe, currencies in the Central and Eastern Europe region remain very volatile and under pressure. The zloty would be our preferred pick on a longer-term view, while the forint remains fragile as twin deficits return to focus. Personnel changes at the Czech National Bank have raised uncertainty around the path of the most favoured currency – the Czech koruna.

Risk aversion and the China slowdown are making life hard for many commodity currencies. Most vulnerable look the likes of the Brazilian real and South African rand – with close links to China. The renminbi itself remains fragile, with USD/CNY risk to 6.80.