FX Strategy Weekly by Lloyds TSB

Disappointing US treasury auctions and widening US/G10 yields differentials have given currency markets something to think about as we approach the end of Q1 and look ahead to the trading themes for Q2.

Disappointing US treasury auctions and widening US/G10 yields differentials have given currency markets something to think about as we approach the end of Q1 and look ahead to the trading themes for Q2. Our two-week view calls for the dollar index to stay well supported, bolstered by a return to positive US employment growth in March. We hold out for a move up to 83.0 if next week Friday’s payrolls data come in roughly in line with the consensus forecast of 187,000. Though the Fed reiterates it is no hurry to raise interest rates, a change in FOMC language in April and ongoing speculation of a yuan revaluation should keep the dollar in the ascent vs the EUR and GBP, with the former unlikely to draw much sympathy overseas from this week’s EU/IMF accord on Greece.

With the Budget in the UK now behind us, campaigning for the General Election gets underway in earnest and is set to put economic data in the shade. We target further downside in GBP/CAD and GBP/CHF over the pre-election period, and reiterate our negative medium term view for GBP/USD.

The start of the new fiscal year in Japan on April 1 and the unwinding of corporate repatriation flows could drag the JPY lower vs G10 currencies over the next two weeks, potentially aided by stronger equities and the return of carry trade flows.

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