FX Daily: Adopting The Brace Position

It's a cautious start to the week for risk assets as investors brace for more bad news on the continued spread of the coronavirus.

Currency view USD: Investors brace for more second wave news

The week starts with investors bracing for some more bad news on second waves of the virus. Asian equities were generally off 2% on news of pockets of outbreaks in Beijing, while the pick-up in US state numbers is also in focus. Over the weekend, Florida reported some higher numbers (daily data typically released around 17CET) and any daily US national case increase above the 25k area would generate some negative headlines. It is therefore a cautious start to the week for risk assets (Dow futures called off 750 points), which as usual hits commodities (Brent off nearly 4%) and all the pro-cyclical currencies which have led the recent charge against the dollar. As we discuss in the June edition of FX talking, however, we see these dollar rallies as corrective and the DXY stalling around the 97.50 area. Second wave fears are going to make for a volatile summer in equity markets but knowing that the Federal Reserve stands ready to do more and uncertainty over US elections, we don’t see USD gains lasting.

EUR: Will the breakout hold?

The top-side EUR/USD breakout has lost momentum and we would want to see the 1.1230/40 support area holding on a closing basis (even if there were risk to the 1.1180 area intra-day) to hold onto a 1.15/16 one-month view. As we discuss in the G10 FX Week Ahead, Europe this week will focus on the EU Recovery Fund at a Leaders’ summit on Thursday and Friday. As long as there is not too much back-peddling on this issue, the positive re-assessment of Europe should continue – including the easing of lockdowns – and the euro should prove a good alternative to the pressured dollar. Today there is also a suggestion of a large EUR/USD option expiry at 1.1260, suggesting spot could gravitate towards this area for the 16CET European expiry.

GBP: No transition, more QE to keep GBP pressured

Now that the UK government has formally declined to extend the EU transition period, the focus shifts to what trade deal Downing Street can secure. Our team looks at a variety of scenarios here. And Prime Minister Boris Johnson meets European Commission President Ursula Von der Leyen today. This week’s highlight will also be Thursday’s Bank of England meeting where we are looking for a quantitative easing top-up. We are still looking for GBP to underperform in June and retain a 0.91 target for EUR/GBP.

JPY: Strong on the crosses

If the yen's underperformance over recent weeks was driven by the reflationary forces of monetary and fiscal stimulus, then the deflationary forces of second waves and renewed lockdowns stand to turn this trend – albeit temporarily. We doubt tomorrow’s Bank of Japan meeting will have much impact on the JPY, while softer equities warn of AUD/JPY pressing 72.00, with outside risk to 70.50.