Central theme in the currency market - ICICI Bank : Treasury Research

Markets remain cautious as the developed world is moving on a path of divergence. On the growth front, while the US economy has moved to a more sustainable growth path, the Eurozone economies continue to remain under recessionary pressure. This is further reflected in the diverging monetary policy stance. While on the one hand, ECB is likely to further ease the monetary policy, Fed is at the last leg of the expansionary monetary policy. Against this divergence in monetary policy stance, we expect Dollar to remain supported and the common currency to remain under pressure. Elsewhere, there is scope for JPY and GBP to weaken from current levels.

DXY: Dollar to remain supported on better macro fundamentals

Latest macro economic data suggest that the economy continues to grow at a modest rate in 2013. On the monetary policy front, though the Fed continues to maintain its asset purchase program of USD 85 bn/month, market expectation is gearing toward reversal in stance.

EUR: Weaker growth outlook to weigh on sentiment

The latest macro economic data suggest that the Eurozone economies continue to struggle on the growth front. On the monetary policy front, the ECB has embarked on rate easing cycle in order to support economic growth. It is yet to be seen, if the lagged impact of rate cut has a desired impact on growth.

GBP: Depreciation bias amidst weak fundamentals and uncertain QE expectation

The strong run up in the Pound Sterling during the month of April had come as a surprise and the current trend, which shows a weakening bias is more in keeping with our expectations. Some of the earlier strength was on account of the stronger than expected GDP print, which allowed UK to narrowly escape a triple dip recession. However, its fundamentals still remain weak be it muted growth, elevated inflation, weak credit transmission and a lack of any distinct improvement in the housing and labour markets.

JPY: Aggressive monetary policy to keep Yen on the back foot

The Japanese markets have witnessed considerable activity yesterday with the Nikkei tanking by over 7%, JGB yields touching the 1% mark and the Yen appreciating sharply to trade around 101.68 levels against the Dollar. The considerable dislocation in Japanese markets and most other markets worldwide was primarily triggered by Fed Chairman Bernanke's comments, which seemed to indicate that the Fed may consider tapering its asset purchases soon.

CHF: Economy remains resilient; but Franc falls amidst talk of further SNB action

The Swiss Franc has weakened against both the US Dollar and the Euro in May amidst market speculation that the SNB might undertake further measures to weaken the Franc. However, there remains possibility that safe-haven inflows might resume later on in the year as Swiss economy as yet remains resilient while Eurozone remains entrenched in recession.

AUD: Trading below parity for the time since June 2012, expected to head higher hereon

The Australian Dollar has remained on a downtrend this month, falling sharply following RBA surprise 25 bps rate cut. The Central Bank also revised lower its year end inflation forecasts by 100 bps to 2%, providing further space on the policy front. This coupled with weak Chinese data weighed on the currency. However, we expect the downside to be capped around the current levels and the Aussie is likely to head higher hereon.

CAD: To trade with a bearish bias in the near term

The Canadian Dollar is likely to continue its bearish bias in the near term amidst subdued domestic growth fundamentals, rising speculation of tapering of asset purchases by the Fed and correction in crude oil prices. Meanwhile, the monetary policy is likely to be held steady this year as the BoC is unlikely to lower the policy rate given the hawkish bias it has maintained for over a year now.

Source : Equity Bulls

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