“US Dollar: Bullish. As the Fed continues to taper, we expect many EM currencies to remain under pressure, as excesses of the unprecedented period of record low US interest rates begin to reveal themselves. Downside risks to euro area inflation and the potential for the ECB to push the deposit rate into negative territory have caused us to turn more bearish on EURUSD. In addition, the USD should retain its upward momentum against the JPY and AUD over the medium term.
Euro: Bearish. Increased likelihood of ECB easing, including a low bar for balance sheet expansion, underpin our bearish EUR view. That may, however, be offset by continued flow-based support.
Japanese Yen: Bearish. The expectation for the BoJ to further ease in the next few months adds to our bearish medium-term forecast. In the longer term we believe the Japanese economy needs a weaker currency, and we expect policy divergence to continue widening in 2014 to take USDJPY to our 12-month forecast of 120.”