Credit Agricole

FX Weekly Outlook

EUR: Our near-term outlook on the EUR is largely neutral. The Eurozone continues to recover, but the ECB could push back against any unwarranted tightening of the bloc’s financial conditions, preventing any meaningful EUR recovery. We remain more constructive on the EUR in the long term as it is likely to benefit from further recovery in global growth and trade that should reduce its growth disadvantage vs the USD. Moreover, demand from Eurozone corporates and reserve managers could prop up the EUR. The EU Recovery Fund’s AAA-rated EUR-bonds as well as the attractive stock market valuations in the Eurozone can further attract investors looking to diversify away from the USD. EUR/USD also looks undervalued.

USD: We expect the USD to remain supported by the US economic outperformance and the Fed’s QE taper that could boost its rate and yield advantage in the near term. The USD can also benefit from its role as a liquid safe-haven currency during recurrent bouts of risk aversion. In the medium term, we expect the US economic outperformance to become less pronounced and the Fed to embark on a very gradual policy normalisation which could keep US real yields negative. This, coupled with some abatement of market concerns about the negative impact of the pandemic, could encourage diversification flows out of the USD, especially given lingering concerns about the US twin deficits, the USD’s overvaluation and the prospect for higher taxes in the US. The USD is the main counter[1]cyclical currency and could further suffer at the hands of exporters and central banks as global trade recovers.

GBP: The GBP has emerged as one of the best-performing G10 currencies so far this year on the back of the speedy vaccine rollout and improving economic outlook that have encouraged the BoE to embark on a very cautious policy normalisation. That said, many downside risks to the economic outlook, both demand- and supply-side, persist due to the pandemic and post-Brexit uncertainty. Coupled with the GBP’s sensitivity to future bouts of risk aversion, these risks could keep the GBP grounded in the near term. We therefore expect any gains only in 2022 when some of the downside risks abate.

JPY: The main support for the JPY in the near term is the spread of the delta coronavirus variant, which has investors concerned about global supply chain interruptions and sub-par global growth. As this outbreak wanes, however, we expect the JPY to weaken, especially given Japan’s lower potential growth relative to the rest of the G10. Japan’s general election later in 2021 will have little impact on the JPY with the ruling LDP-Komeito coalition likely to win.