Saxo Bank G-10 FX Forecasts

This article is the third part of the FX Monthly for June. All articles will be available as a PDF tomorrow

Base Case: Our base case scenario again assumes a risk-bearish trajectory for the medium to longer term. The short-term environment this time around has been extremely volatile, as often happens in risk averse markets, so we are least comfortable with the 1-month view, since the market can lurch around widely in a wide range – witness AUDUSD falling well below even our 3-month 0.8300 during early June before rallying back to within 100 pips of the one-month target from mid-May at 0.8600 (AUDUSD was trading at 0.8900 when we created the target – so we had a tremendous 10%+ range in AUDUSD over the last month) . Our measures of risk appetite (Saxo Bank Carry Trade Index) suggest higher odds of the market continuing to de-risk even in the shorter term rather than trying to re-establish carry trades immediately. If the move in risk aversion peters out more quickly than expected, however, the shorter term reality could diverge rather sharply from our 1-month forecasts.

Alternative Scenario: This month, we consider various alternative scenarios depending on the currency. There are two key overall jokers in this market – risk appetite generally and the Euro specifically. On the risk appetite front, we perceive very low odds of a strong rally in risk in the near term, so our alternative scenario would only include a modest rally in risk and perhaps a large consolidation in the bond market, which could still cause plenty of upside in commodity currencies and downside in the JPY in the near term before we get back to looking at a longer term bear market for risk. Those arguing that summertime volatility will go quite might look for this kind of scenario. As for the Euro, positioning is so heavy on the weak Euro theme that we judge the two-way risk in many Euro cross to be extreme in the short term.

The full FX-Monthly can be downloaded tomorrow as a  PDF