G10 breakdown and convincing trades - Nomura

USD performed in G10 space this week despite a poor employment report last week, which had pushed back economists’ expectations (including our own) for a hike at June’s FOMC meeting.

Key Quotes:

"JPY weakness continued, with Japanese officials' continued verbal intervention ahead of G7 meetings, with Finance Minister Aso repeating that extreme FX moves are undesirable. Norges Bank and the BoE were on hold as widely expected."

"FX markets are stressed, and more so than other markets. Volatility remains above normal levels, and until it falls we can’t have any confidence that Q1’s instability is behind us."

"FX markets are likely to remain skittish on whether risk is on or off. That said, without a sharp slowdown or recession in the US or China, we view a full-blown risk aversion episode as unlikely. However, in this uncertain environment, RV trades can be attractive."

"We believe that “A kiwi can fly above a kangaroo”, seeing further downside in AUD/NZD, with the rates outlook and terms of trade all pointing lower. Elsewhere, as oil approaches $50 (a crucial level for the economy) we see an increasing role for the oil price in NOK."

"A further oil price recovery can drive NOK strength in a nonlinear fashion. We expect CHF to continue to weaken despite some positive inflation data, as the domestic economy remains weak, and the SNB continues to view CHF as overvalued."

"Finally, we view that the BoE won’t hike if Brexit occurs, and though intervention cannot be ruled out, it could lack credibility."

"Looking ahead, our high conviction views remain EUR/USD downside amid continued ECB dovishness (and risks of an earlier Fed hike than the market is pricing), continued euro-area purchasing of foreign assets, and a more positive outlook for risk sentiment. We like downside AUD/USD, expressed in our 0.725/0.70 put spread, amid a more dovish RBA and bearish outlook for iron ore prices."