BNP Paribas: Exit short EUR/USD

The ongoing market turmoil in both the fixed income and the equity markets
continues to produce liquidation of conviction FX trades. EUR is increasingly
negatively correlated to risky assets (chart 1). Our own recent short EURUSD
recommendation traded through our stop of 1.1390 this morning so we exit with a
1.7% loss (established at 1.1200 on May 5). Our view is that for the USD, stronger
Q2 data will be increasingly important in determining that the factors behind the Q1
economic slowdown are temporary and largely in the past now.

While we continue to favour long USD exposure over coming months, we are
respectful of the current price action and will move to the sidelines. We continue to
expect search for yield to support eurozone investor outflows. Our long USD
exposure is now focused on upside option structures for USDCHF and USDJPY.
We think that tomorrow’s non-farm payrolls release will be critical for future USD
momentum. Our US economists forecast 275K.

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