NZD: NZD/USD Holding Recent Ranges, AUD/NZD Close To 1.10, AU CPI Later

J.P Morgan: "Fed, not trade, is weighing on the dollar

Outlook: The recent sell-off in the USD is a part of the unexpected, pro-cyclical turn in markets, which owes as much to tariff fatigue as to falling US real yields. The latter owes to unresponsive Fed policy in the face of a sharp tariff-induced surge in front-end inflation expectations. An imminent reversal of this dynamic is difficult to foresee, but the substantially advanced stage of the USD de-risking cycle should slow the pace of any further weakness. The intensity of recent JPY strength has been surprising, but further follow-through lower in USD/JPY will run into fulsome BoJ pricing, extended speculative length, domestic outflows, and policymaker discomfort with the JGB sell-off. Only limited spillover from the sharp rally in Chinese equities onto CNY FX.

Macro Trade Recommendations: Modestly long USD and short EUR (vs USD, SEK) but in reduced size and more optionalized. Take profit on EUR/JPY put spread with spot near lower strike. Hold short CHF/JPY on rates convergence but take profit on short NZD/JPY leg of JPY basket on valuations and after local catalysts. Take profit on EUR/NOK put spread and short GBP/SEK leg of SEK basket as UK data resilient.

Emerging Markets FX: Stay MW FX in GBI-EM Model Portfolio but hold a diversified tactical basket including longs to benefit from the scope for a relief rally.

FX Derivatives: Buy a Corr swap in EUR/CHF via USD due to a USD-centric market and low EUR/CHF vol. A Ukraine cease-fire may boost European FX; consider RV trades favoring high beta European currencies vs the EUR. We review our EM FX Vol Carry portfolio.

Technicals: EUR/USD bullishly pressures key pattern resistance. GBP/USD presses deeper into resistance near 1.26 and trades above a clear base breakout. USD/JPY triggers tactical buy signal. USD/CNH pressures key chart pattern support. AUD/USD makes some progress after breaking through base pattern resistance." 

Goldman Sachs: "For the broad Dollar, the question on investors’ minds is whether we are heading for a 2017-style repeat. That year saw relatively little change on US tax and trade policy, set against more balanced global growth that was helped by foreign fiscal expansion, and the Dollar had its largest drawdown in the post-GFC era. The parallels to today are clear, and the risk of a repeat is rising. However, there are also clear parallels between today and early 2018—when the US announced new steel and aluminum tariffs, was engaged in testy trade negotiations with Canada and Mexico and preparing to raise tariffs on China. And, there are also important differences. Most prominently, better global growth in 2017 was likely supported by China’s earlier stimulus measures that boosted growth around the region and in Europe. Today, China’s fiscal support is more targeted and less global, and we think the potential for European fiscal stimulus looks more modest. Ultimately, our baseline forecasts are more aligned with the 2018 parallels than 2017. But we continue to monitor the important downside risk to our Dollar forecast that the balance of US policy changes and the foreign response is different than we expect. When we drill down into our forecasts for the individual crosses, these risks fall into five categories: i) tariff changes are smaller or later than we expect, ii) the composition of the tariffs is different, iii) the foreign fiscal policy response is greater, iv) foreign currency management is tighter, and v) the monetary policy response to countervailing growth and inflation impulses is more nuanced. While each of these risks is drawing closer, in different ways, we remain comfortable with our baseline forecasts. As a result, our strongest view is that FX markets appear to be underpricing what we perceive as relatively thick tail distributions that should make Dollar calls attractive for a variety of investor types."