Long EUR/GBP on growth divergence, not election outcomes

From the FXWW Chatroom: The UK vote on Thursday will be in focus this week, but we don’t expect the results to change the long term GBP outlook. If opinion polls prove accurate, a more pro-Brexit parliament could still result in a confrontational negotiation. Recent improvements in the UK’s current account have led us to revise lower our EUR/GBP forecasts, but we still favour long EUR/GBP as a way of expressing both the UK consumption squeeze and improving Eurozone growth.

On Thursday we also expect the ECB to drop its interest rate easing bias as it prepares for a taper decision in September. We think Pres. Draghi will avoid a hawkish tone however by emphasising that a “substantial degree of accommodation” will be maintained.

In Australia, strong Q1 inventory data added further momentum to AUD following soft US payrolls Friday. UBS Economics still expects Q1 GDP on Wednesday to grow 0.2% q/q, but now with risks skewed to the upside. For the RBA tomorrow we expect no major changes in tone. (UBS)

USD sellers vs EM with CNH/CNY in the standout – c. 1 bio USDCNH/CNY cash sold and further downside interest continues the theme from last week. As mentioned last week a lot of the downside interest was via spreads, with the sold legs in 6.78-6.80 area for 2-4m tenors so spot is stabilising in the area that market makers are long strikes. Also c. 300 USDPHP and c. 300 USDINR with mix of HF and RM involved across USDAsia. Similarly we have seen better sellers of USD vs CZK, HUF, and ILS. Latam flows light and mixed.

USD selling vs JPY/CHF/Gold post NFP – Light week for G10 FX flow, slight better USD buying bias most of the week but saw USD selling post Friday’s NFP data vs JPY/CHF/Gold from HF.

GBP downside on poll data – Significant buying of GBP put options, mostly HF after polls started to tighten.

EUR topside closing, ECB offered and FED bid – EURUSD general theme was for closing of topside structures and a clear divergence of views on ECB and FED events, with the former offered but the latter in demand.

Overall clients still adding little risk and avoiding premium outlay – Partly due to generally low returns 2017 to date. Interest for AUDNZD downside in response to the spot price action, but still all front end options. (UBS)

Qatar scandal should on the margin benefit Malaysia (LNG exporter), as well as Australia being LNG supplier to Asian market during ongoing cooling season. As Qatar is producing some 30% of the world LNG!
That’s why AUD is up probably
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