AUD/USD, USD/JPY, EUR/USD: Strategy and Institutional Forecasts Latest

Today’s institutional forecast and strategy publication considers likely direction in the Euro-Dollar, Australian Dollar-US Dollar and US Dollar-Yen.

• BMO Capital: EUR/USD at 1.07 in 3-6 months
• BTMU: AUD/USD should be towards 0.70
• Societe Generale: USD/JPY above 110 this summer
• Citi FX: USD/JPY near-term reversal seen

BMO Capital: EUR/USD Down to 1.07 Near-Term, 1.10 Longer-Term

BMO Capital have released their latest foreign exchange forecasts for the coming quarter.

For those watching the Euro / Dollar exchange rate, it is all about playing the range.

BMO’s Stephen Gallo writes:

“We expect EURUSD to trade at 1.07 in 3M and 1.10 in 12M. Post-Brexit uncertainties and additional ECB easing will weigh on the EUR during risk off, but the EUR’s funding currency status will also weigh during risk-on.

“Asset scarcity will persistently cap yields. Weak investment spending weighs on corporate issuance and limited fiscal stimulus weighs on government issuance (right chart).

“Italy faces a big dilemma. With a state-backed bank bailout, PM Renzi undermines Brussels and the EU’s legitimacy. Without one, a private creditor bail-in strengthens Italy’s anti-establishment parties. A middle-of-the road compromise or a fudge won’t halt Italy’s growth recession or financial sector malaise."

BTMU: Close Call on RBA Rate Cut, Australian Dollar Should be Closer to 0.70 vs US Dollar

According to eFXNews, the institutional research provider, Bank of Tokyo Mitsubishi believe the AUD/USD should be trading lower.

However, as a report supplied by eFXNews shows, the driver for a lower Aussie-US Dollar rate is not likely to be lower RBA rates:

“The probability of the RBA cutting rates on 2nd August have declined a touch after the Q2 inflation data showed a slightly higher trimmed mean rate, which remained at 1.7% rather than falling to 1.5%. The overall CPI reading was a little weaker while the weighted mean rate was in line with expectations. So it remains a very close call at this stage on whether the RBA will act next week.

“We just about lean in favour of a 25bp cut given the data will not alleviate low inflation concerns within the RBA. The 2-year yield and the 3-month OIS both increased by a few basis points but still imply a greater than 50-50 chance of a rate cut next week. That perhaps is one factor undermining AUD/USD – the data has certainly not shifted expectations greatly that the RBA will ease.

“Furthermore, on a relative basis, like with EUR/USD – the 2-year spread with the US has seen the premium in favour of Australia falling to a new low this month as yields in the US pick up again and the spread is consistent with AUD/USD closer to 0.7000 rather than 0.7500.”

US Dollar / Japanese Yen: Back Above 110 say Societe Generale

This morning’s Japanese policy story is that Japan will announce a fiscal stimulus package of ‘more than Y28trn’ with Y13trn in new fiscal measures.

eFXNews are also reporting that Societe Generale believe the ongoing events in Japan are in keeping with a USD/JPY exchange rate above 110 over the near-term:

“The reaction to the news ranges from hope to massive scepticism that all we will get is a set of existing spending measures repackaged to look impressive.

“The key is how much new bond issuance it leads to and speculation that Japan will start issuing 50year JGBs reflects the ‘hope’ side of the debate. The more debt-financing there is for easier fiscal policy the better for growth and the more of that spending that is financed by the BOJ buying low-yielding long maturity debt, the better too.

“The 10-30yr JGB curve slope has steepened sharply in the last few weeks and the chart shows a spurious correlation with USD/JPY.

“More fundamentally, the 10year real USD/Japan yield differential is back up to 75bp.

“There’s more than enough uncertainty around about what policy measures will actually be taken but if we get a meaningful fiscal package, more BOJ bondbuying, and any kind of upbeat FOMC message, I think USD/JPY can get back to 110 over the summer.”

Citi see Near-Term USD/JPY Reversal

Citigroup’s FX unit have also reflected on the latest developments out of Japan noting markets appear to be bracing for the coordinated BoJ easing/ fiscal stimulus programme to disappoint.

Citi Economics’ baseline scenario for this week’s BoJ meeting is for a policy rate cut from -10bps to -30bps and an increase in ETF purchases from ¥3.3trn to ¥5trn-¥6trn – such a move would likely disappoint and could see further Yen buying from that already seen over the past 24 hours

CitiFX Technicals team points to the reversal lower in USDJPY from the highs on Thursday with next support seen at 103.92/95 then 103.40.

The picture is similar on JPY crosses – EURJPY double top targets 112.60, GBPJPY double top targets 133.30.