Trading strategy | We still think the Fed tightens in September but risks around that have risen as FOMC cuts 2015 growth forecasts. Tactically, we exit EUR/USD shorts believing a squeeze higher looms. However we resist new tactical EUR longs because of the fattening Greece tail risk. As UK growth accelerates, front end UK yields rise. We exit long EUR/GBP and enter EUR/GBP shorts. Slowing China growth and softer commodity markets weigh heavily on Antipodes FX: Stay short AUD/USD and short NZD/USD. JPY valuations raise questions about regional competitiveness of other Asian currencies. Stay long JPY/KRW. INR is our preferred Asia FX long on reforms, oil price and carry. Stay short USD/INR. With risks still in favour of a lower oil price, we stay long USD/MYR.
NZD downside favoured | Conditions turned sour for the NZD in the last two weeks. The RBNZ surprised at least half the market by cutting rates. The GDP growth data in Q1 was well below expected, suggesting the economy has slowed much more than earlier thought, consistent with other recent indicators that have lost momentum this year. Last week, consumer confidence fell to a low since Sep-2013. The drag from weaker commodity prices also continues with new lows set in dairy prices and overall New Zealand commodity price indices since 2009. It may be getting a little late to jump on the band-wagon, but there is still some life left in this fall in the NZD as the market stays focused on rate cuts.
(Royal Bank of Scotland – RBS)