USD: Bullish. As the Fed continues to taper, we expect many EM currencies to gradually come under pressure, as excesses of the unprecedented period of record low US interest rates begin to reveal themselves.
EUR: Moderately bearish. After cutting rates we believe EURUSD prospects will be determined by the evolution of short-term real interest rate differentials and flow-based factors, where we see scope for the euro support to diminish a little.
JPY: Bearish. The ongoing deterioration in Japan’s current account deficit, combined with our outlook for US yields to rise later this year, should keep USDJPY trending slightly higher.
GBP: Bullish. Data remain strong and market expectations for the BoE to hike continue to be bought forward, especially after Carney’s speech. Expectations for divergence between Eurozone and UK rates are at historic highs. However high positioning is a risk to this view, particularly as the Scottish referendum approaches. Whilst housing concerns remain we do not expect any macroprudential measures from the FPC to have a significant negative impact on GBP.
AUD: Long-term bearish. The RBA seems likely to turn more dovish after the Q2 inflation print, with declining yield spreads and falling commodity prices pulling AUD down further out. JPY* 96.07 96.46 98.40
NZ Dollar: Mixed. We expect NZD to outperform AUD but to lose ground against USD in a broad USD strength environment. We look for monetary and economic divergence between Australia and New Zealand to continue driving AUDNZD lower in 2014.