[AndrewWoo]

The USD in long-term decline

Modest short-term tactical forces are working toward USD appreciation, but over the medium and long term, it is hard to identify US assets whose performance will be attractive enough to motivate large capital inflows. While we there is no immediate USD weakness, the 12m EUR-USD forecast is 1.50.

EM PROSPECTS

Welcome to the post-crisis

We expect commodity currencies in LatAm to mirror the expected appreciation of AUD and NZD, and emerging Asia to appreciate vis-à-vis the majors. The stable-to-firmer outlook favors carry currencies such as BRL, IDR, INR, and TRY. By contrast, the looming risk of a Latvian peg realignment, combined with a lingering economic malaise, advises against Eastern European currencies.

RISK

Risk-reward favours EUR and GBP

Risk still matters, despite risky assets having moved back to more reasonable levels compared with the winter. The most important driver of risk is likely to be the inflation/deflation debate. EUR and GBP are attractive from a risk-reward perspective.

JPY

Interest rate volatility to keep USD/JPY subdued

USD/JPY will remain within a 90-100 range in Q3, with any further rise in US Treasury yields likely offset by an increase in yield volatility. The main risk is a sustained bear flattening of the US yield curve due to a sharp US economic bounce and a more hawkish Fed.

COMMODITY CURRENCIES

Relative value in the medium term

The commodity currencies will pull back further in the near term, but that this will create opportunities to enter medium-term long positions in these currencies.