We think FX should remain in a low volatility regime under a range of likely economic scenarios. On the one hand, the Dollar should be supported by solid US economic performance and bright prospective investment returns, and it is on the right side of the energy and carry themes that we think are key to the current backdrop. On the other hand, negative Dollar impulses have come mostly on the policy side. We think this back-and-forth can continue for some time. On JPY though we have been bullish for some time, post Friday's BOJ policy meet, it seems EURJPY is a better short than JPY itself. Ueda’s comments in the press conference emphasized that the Bank does not feel behind the curve, suggesting a high bar for an October hike. That, combined with the global backdrop remaining a source of downward pressure on JPY—which should persist if the Fed hikes again in October as we expect. But we still see clearer long-term asymmetry in USD/JPY downside though the time for that view is not there yet. CNY is likely to remain strong as we approach the Xi Trump summit. On a macro basis, we believe that moving China’s bifurcated economy closer to both external and internal balance would require two policy instruments—currency appreciation and fiscal support for the domestic economy. Hence, we believe that USD/CNY is eventually headed towards 6.40 in 12 months. GBP is likely to be underpinned by BOE's dovish outcome last Thursday. An under-delivery of BoE hikes should apply steady upward pressure on EUR/GBP in the months ahead, and current levels in the cross are already well below those implied by rising rate differentials. On EUR, we see it being range bound between 1.14 and 1.16 till further clarity emerges on ECB’s reaction function towards higher crude prices. While we believe Fed might hike in October, we do not see terminal rate for Fed beyond 4-4.25% in this rate hike cycle, hence the downside for EUR is limited at 1.14.
