Our conviction in selling the EUR has only increased, but the deterioration in Japan’s economic circumstances and improved tactical opportunities in the USD and GBP lead us to a change in our preferred line-up on the long side.
A worsening economic outlook and more rapid disinflation in the euro area imply that ECB accommodation will be kept for longer and perhaps increased in scale, opening further downside potential in the common currency.
Yet Japan’s data, too, have disappointed and the JPY’s recent erratic movement reduces our conviction that EURJPY has similar downside to other EUR crosses, even if it does offer increased protection from tail risks.
Nearer term, the GBP should benefit most versus the EUR from the G10’s fastest economic growth and greatest underpricing of short-dated interest rates.
The broad-based USD rally looks set to continue as robust US growth shines amid a softening global economy and upside risks to the Fed’s policy path make it the best strategic long.
Accordingly, we recommend rolling short EURJPY positions into a short EURGBP and short EURUSD from 0.8004 and 1.3280, respectively.
Developments in Europe this summer (see EUR downside: this time it’s real, 4 June 2014, for our trade recommendations) have only increased our conviction in broad-based EUR downside. However, the data in Japan and recent behavior of the JPY have reduced our conviction in it as the best risk-adjusted long versus the EUR. Instead, we see increased tactical opportunities in short EURGBP and better strategic opportunities in short EURUSD.
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