“The USD may replace its reflation related bid with safe haven related demand. This scenario suggests the JPY staying correctively strong for now,gaining on many crosses, while GBP and high yielding currencies may be hit as political and currency related concerns increase.
Deflation tends to increase real yields of low yielding currencies, suggesting USDJPY may drift towards our 112.50 target. However, GBPUSD breaking lower will undermine any bid in EURUSD too. This applies even more when following the Carney argument of seeing a failure of UK-EMU negotiations leading to a disproportional increase in inner EMU financial stability risks. Peripheral spreads quietly workinghigher supports Carney’s view.
Meanwhile, Greece could move quickly back into focus should the IMF opt-out require new negotiations with Greece and a new approval by the German Bundestag according to Germany’s Schaeuble. Accordingly, there could be a new programme implying additional fiscal measures and further
We used the recent rally in EURUSD to add a short position from 1.0650 to our portfolio. Our arguments for a weaker EUR have not changed. In the absence of further political integration, the ECB may have to remain accommodative to support the struggling periphery even as the core overheats drastic reforms in Greece. The issue becomes even more complicated when we put the views of the incoming US administration into Europe’s context”.
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