Courtesy of Claudio Piron and Athanasios Vamvakidis, FX strategists at Bank of America-Merrill Lynch (BAML), here are the bank’s FX forecasts for G10 and emerging market currencies over the next 18 months.
Piron and Vamvakidis say that they maintain their positive view towards the US dollar, but believe investors will need to be “more selective” on how they position for renewed strength given “the trigger for a meaningful move higher in USD will be strongly predicated on progress on tax reform”.
Here’s a brief synopsis on what G10 currencies they currently like, and don’t like, for the period ahead.
Following the French elections, the focus for the EUR shifts to the ECB QE tapering debate this fall (Spring in the southern hemisphere). As both the Fed and the ECB will be tightening policies, while the BoJ remains on hold, we are long both USD and EUR against JPY, while we see the EUR/USD outlook as being mixed for the rest of the year. We expect diverging monetary policies to also support EUR, SEK and NOK against CHF. USD bulls may want to consider shorting AUD/USD. The short NZD/JPY market position could be at risk. On GBP, we are concerned that the consensus has become too positive on Brexit. A tough negotiation ahead will likely see GBP/USD trading below 1.25 before trading above 1.30 in the months ahead.
And here’s their view on the outlook for emerging market currencies in Asia.
In Asia FX, we note a shift in FX policy, becoming more accepting of appreciation. This is evident in INR, KRW, SGD and TWD. Client positioning and appetite for short CNY positions is not evident with investors confident that China is reining in excess credit growth without undermining the economy. Overall, in EM Asia, we believe carry trades will continue to perform.