EUR: Absence of event risk to leave currency range-bound.
We expect any EUR downside from the current levels to remain limited. This is due to stable ECB rate expectations and supported risk sentiment. As part of last week’s ECB press conference, Draghi reaffirmed that interest rates will stay at the current low levels for an extended period of time. We infer that more time is needed in order to evaluate the latest policy measures’ impact on the economy.
Accordingly investors’ ECB rate expectations should remain suppressed for now, leaving the EUR driven by external capital flows (in turn driven by risk sentiment and the Fed monetary policy stance). In this respect improving global growth prospects are likely to keep global risk sentiment supported, while the Fed has again signalled it is unlikely to turn more hawkish anytime soon.
In terms of market moving events it will be relatively quiet, perhaps with the exception of further comments from ECB President Draghi (Wednesday).
Given this absence of new drivers, EUR/USD should range-trade between 1.3550 and 1.3650 in the week ahead.
CHF: Still a sell versus periphery – we like NZD.
CHF will remain a sell on rallies this week – particularly against high yielders such as the NZD. This is due to additional room provided by improving risk sentiment to sell CHF. Moreover we see little scope for the SNB to become less dovish over the next quarter.
From these angles this week’s focus will be on the release of inflation and retail sales data. Regardless of improved growth prospects, the overvalued franc is keeping monetary conditions tight. This in turn suggests that there is little risk of inflation surprising considerably higher. From that angle the CHF is likely to remain driven by global risk sentiment, which we expect to improve further given brightening global growth prospects.
All of the above suggests that the market environment will stay in favour of carry trading strategies. Hence we maintain our view that peripheral crosses such as NZD/CHF should be bought and target 0.7880 this week.
