· The euro has weakened on net against all G10 and major EM currencies in the first weeks of the new year. This broad weakening has been a function of ECB easing, which has weighed on the euro, and stronger global data, which have boosted risk-sensitive currencies broadly. The key question for currency market participants as we move into the second half of January is “can the downtrend in the euro crosses extend further?”
· The arguments for continued EUR weakness are certainly compelling. We expect the ECB to ease its repo rate again in the months ahead, and the February three-year LTRO is likely to see another large slug of new liquidity enter the system as collateral rules are eased further. At the same time, we also expect data flow to generally be consistent with improving risk appetite and stable global growth expectations.
· Despite this, we would be cautious of extending short positions in the euro crosses and see scope for short squeezes as euro stress increases in the weeks ahead. Past experience has shown that rising systemic stress in the euro area has the capacity to damage business sentiment quickly, derailing global growth trades. Alternatively, at some point, improving optimism with respect to global growth could lead to improved perceptions of euro debt sustainability.
· Forecast update: We have made adjustments to a number of G10 and EM forecasts to take into account better US and global data and the effects of aggressive ECB easing measures. We have revised down our EURUSD forecasts, but at the same time tempered our USD-bullishness against AUD, CAD, MXN, and ZAR for Q1. On EUR cross rates, we have pulled back our bullishness against Scandinavia and AUD.
· What to do: As a lower-risk way of positioning for further broad EUR weakness, we have recommended short EURSGD positions. At the same time, we have recommended long GBPSEK positions as a way of expressing the view that the SEK is vulnerable as core euro area activity continues to slow.
· HUF update: The HUF has weakened for local idiosyncratic reasons this year. Inside we update our views on this currency.
Click here to read the full report: Credit
Credit Suisse FIXED INCOME RESEARCH & ANALYTICS