Peak In EUR/USD Behind US‏

We now believe that Q1 marked the peak in EUR/USD. Range trading should continue to be the order of the day in the cross for the near future, as relative central bank policies still favour the euro but we now see the range more likely to be in the high 1.20s for H2. Soon, the market will have to price the Fed scaling back on QE and, in our view, this will lead to broad-based USD strength. We now target EUR/USD at 1.27 in 12M but underline that risks are skewed on the downside for the cross. The exact timing of the Fed 'exit' is still likely to be the key driver for the USD.

We still expect the combination of fiscal tightening and monetary easing to weigh on JPY and GBP but we now expect GBP weakness to materialise later than previously expected (Mark Carney will have to show his merits) and see GBP slightly up on a 12M horizon.

On the Scandies, we still see some potential in both the NOK and SEK against the EUR but we have lifted our 3M forecast for EUR/SEK to 8.40 (from 8.20), reflecting that risks have become more two sided. Over the summer, the SEK could be vulnerable, with the Riksbank on the verge of cutting rates. Rate cut expectations could also easily re-emerge in Norway.

For the commodity currencies, we now look for prices to stabilise on a 3M horizon. NZD strength is curbed by RBNZ's willingness to intervene, whereas the near-term outlook for the CAD depends on new Bank of Canada governor Stephen Poloz's policy stance. On a 3-12M horizon, the AUD, NZD and CAD are likely to depreciate vis-à-vis the USD as the Fed exits from QE. The CAD is set for the better outlook of the three, as US activity spillover supports Canadian growth.

We have pencilled in even further CNY strength following the strong pace of appreciation in recent months. We expect the daily trading band to widen soon, from +/-1% to +/-2%, and now target USD/CNY at 5.98 in 12M (from 6.08).

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