Trade Recommendation

Trade Recommendation: HALF RISK SHORT USDJPY at CMP 146.85, HALF RISK AT 148.85, TP 140 & SL 152.15 We have been of the view for past several months that BOJ is running behind it’s rate hike cycle. We also have mentioned in our below mentioned recent pieces why the BOJ should hike in the 30th Oct meeting: https://macro-spectrum.com/opinion/boj-19th-sep-preview-hold-for-now-to-hike-in-oct (Released on 13th Sep’25) https://macro-spectrum.com/opinion/fed-boj-live-in-another-world (Released on 21st Sep’25) After yesterday’s Tankan survey and recent commentary by BOJ speakers in the past week, we are reasonably certain now that BOJ will hike in the 30th Oct meeting. Confidence among Japan’s large manufacturers improved for a second straight quarter. The business sentiment index climbed to 14 from 13 in the three months ending September. The gauge for large non-manufacturers remained at 34, near the highest level since the early 1990s. BOJ Deputy Governor Shinichi Uchida comments today further add to our view. (a day after the release of Tankan survey yesterday). By declaring that the BOJ’s Tankan survey released Wednesday indicated that business sentiment is at a favorable level, Uchida appeared to be suggesting that the report showed the economy is developing in line with the bank’s outlook. BOJ watchers give particular weight to Uchida’s remarks as he is known to have played a key role in plotting and executing monetary policy for more than a decade as a veteran central banker. Even in the last meeting on 19th Sep, two board members dissented from keeping the policy rate on hold at 0.5% last month, calling instead for a hike. Tamura and Takata each submitted a proposal for a rate hike to 0.75%. Since the new BoJ Law came into effect in 1998, there have been three instances when some of the policy board members have proposed a rate hike, which was subsequently voted down: July 2000, January 2007, and December 2024. In all these cases, a rate hike was decided at the subsequent meeting. Following this trend, the probability of an October rate hike appears high. Also, board member Asahi Noguch, considered dovish, pointed to the rising need for an interest rate hike in comments earlier this week. The only risk to our view is if in the 4th Oct LDP leadership elections, Sanae Takaichi wins over Shinjiro Koizumi. On the other hand, a victory for Koizumi could potentially catalyse more JPY strength, given that he is perceived as more supportive of Bank of Japan (BoJ) policy normalisation than Takaichi, and that the market does not seem to be actively positioning long JPY. Summary: Recent Japanese economic indicators have showed that local economy is performing well in spite of US tariff effects on Japanese exports but inflation is running consistently ahead of it’s 2% target. Hence the much delayed 25 bps rate hike from BOJ can be expected in it’s 30th Oct meeting. Recent political issues have delayed the rate hike but assuming Takaichi does not win, we see a very strong probability of 25 bps rate hike by the BOJ in the October meeting. Hence, we are bullish JPY and expect to see the test of 140 levels by end Dec’25. Technically the 139.70 level is the 38.2% retracement level of the entire move from 105 to 161 in the last 5 years. It was tested twice in Sep’24 & Apr’25 but this time it might surely break below it due to far lower UST-JGB differentials. Trade Summary: HALF RISK SHORT USDJPY at CMP 146.85, HALF RISK AT 148.85, TP 140 & SL 152.15

Trade Recommendation: SHORT EURGBP (HALF RISK AT CMP 0.8655, HALF RISK AT 0.8725) TP 0.8505 & SL 0.8770. We believe BOE’s last week cut was a hawkish cut with final outcome of 5-4 vote for 5 voting for 25 cuts & 4 voting for hold. This was against market expectations of 2-5-2 i.e. 2 members voting for 50 bps cut, 5 members voting for 25 bps cut & 2 members voting for hold. Also, the BoE’s updated macroeconomic forecasts (average inflation projections were raised for 2025-27) and the closeness of the policy vote send a clear hawkish signal, and raise doubts over the pace and extent of further easing from here. We now expect the next cut by BOE in Dec’25. By the 7 November meeting, policy makers should have further evidence of labour-market weakness but are unlikely to know if inflation has peaked – the BoE now anticipates a peak of 4.0% in September, but the October data will not be released until after the November meeting. So, MPC members may opt to wait for signs of falling y/y inflation. This implies a stronger GBP on interest rate differentials specially against EUR where we feel ECB might be forced to cut another 25 bps by Dec’25. Eurozone faces immediate short-term headwinds of 15% tariffs as well as a slowing Chinese economy. We expect the euro area economy to recover only gradually in the near term, due to soft consumption and structural weakness. Eurozone is only pricing in 13 bps of cut by Dec’25 which we believe is very low compared to where actual macro numbers might pan out in next quarter. So, while BOE might remain on hold till Dec, ECB might have to cut by 25 bps before even Dec. Even terminal rate wise, GBP looks attractive against EUR at current EURGBP levels.

RBA policy meeting is on 20th May which we believe might be a hawkish 25 bps cut. Market is currently pricing in a terminal rate of 3.21 levels by CY26 (current policy rate is 4.10). We believe this is very aggressive pricing. We believe that RBA might cut by 25 bps each in it’s 20th May & 12th Aug meeting and then go on a long pause. For us the terminal rate is 3.6% through CY26. The ~7 bps of cuts still priced in for the July RBA meeting looks particularly vulnerable to us. We also believe that RBA is likely to announce active QT in the 20th May meeting from it’s current passive QT. This should augur well for AUD too. Hence, we remain bullish on AUD because the market is currently pricing in a lower terminal rate than our expectations. Also, AUD looks to be the perfect proxy for both risk on and risk off situations. Trade Summary: LONG AUD (CMP .6405) TP .6550 & SL .6335

EURAUD had a sharp melt up on Friday due to AUD being down roughly 5% and EUR down only 1%. At these levels we believe AUD is significantly undervalued against Euro. The last time S&P500 went to 5200 on 5th Aug’24 and Copper was then 412 (AUD is commodity driven), EURAUD was at 1.69. Now when S&P500 is at similar level and Copper still at 440 level (far higher than the Aug’24 level), EURAUD stands at 1.8150. Which is almost 8% higher than Aug’24 level. This looks to us extremely over bought. ECB deposit rate is 2.5% currently and market pricing of terminal rate is 1.65% whereas for RBA current policy rate is 4.1% whereas the terminal rate pricing is 3.09. This still does not explain the 8% over valuation of EURUISD. Hence, based upon both current interest differentials, forward interest rate pricing & global risk outlook, EURAUD looks extremely overbought. In addition, Eurozone faces 20% tariff whereas Australia faces only 10% tariff from US in the reciprocal tariff regime. In fact, Australia is one of the few large DMs which runs a trade surplus with US. Hence to us AUD looks severely undervalued against Euro and fair value is app 170. But since markets can remain unreasonable for some time, we believe 1.75-1.77 is where EURAUD should stabilise as market panic stops. Trade Summary: SHORT EURAUD (Half risk at CMP 1.8145 & half risk at 1.8545), TP 1.7745 & SL 1.8745.

Trade Recommendation: LONG EURGBP (Half risk at CMP .8365 & half risk at .8325), TP .8490 & SL .8225 Due to the material month end flows in favour of DXY against Euro, EURGBP has sharply moved lower to .8365 levels currently. It has also gone below the 100 DMA of .8335 and made a low of .8316. We believe .8320 level is an excellent level to buy EURGBP as it is also the 23.6% retracement of the entire move between the 1yr high of .8613 & the 1yr low of .8230. Fundamentally, last week lower than expected CPI nos in UK as well as the Spring statement from UK Chancellor demonstrates the UK issues with fiscal tightening (as loosening elsewhere) and a growth forecast that is still too high further out should weigh on the pound at some point. In ECB rate pricing, markets are still pricing in 60 bps of cut in REMCY25 which is high as per our view that ECB might cut only once now in June by 25 bps to end with a terminal deposit rate of 2.25%. Hence, we remain bullish on Euro for this reason too. And the best way to express this view is via short GBP which looks over priced to us in current volatile times.

Last week’s European fiscal announcements should lay the groundwork for stronger growth, higher inflation, and last week’s ECB decision likely being the penultimate cut. Following recent fiscal announcements, our new ECB view now envisages just one more 25bp cut in June to a 2.25% terminal depo rate. A combination of support from the CDU/CSU/SPD (the incoming government) and the Greens means the plans should pass a vote on Tuesday in the existing Bundestag, with a two-thirds majority needed to make changes to the constitution.Hence both because of fiscal expansion as well as reduction in no of cuts, EURO ideally is headed towards 1.15 levels in medium term. There might be some short term drops due to tariff related news from US on European exports. But these drops might be utilised to buy EURO. Markets are still pricing in 48 bps of cut (below) which we believe might get limited to maximum 25 bps only for REMCY25. Technically, 1.0725 the 200 DMA might be the best place to buy EURO but we might never get these levels again. Hence as per risk appetite one should distribute longs in EURO from 1.0880 to 1.0720 levels for a target of 1.1480 levels in 3-6 month time horizon.SL at 1.0480. CMP 1.0880