From currency analysts at Bank of America Merrill Lynch:
We are short EUR/JPY, expecting it to weaken to 114 from currently 128 by the end of the year. We would prefer it from short USD/JPY, as more ECB easing this spring could offset the impact of more BoJ easing.
Alternatively, we still like selling CHF/JPY. We first expressed this view last August. Since then, CHF/JPY has weakened by 7.7%. However, JPY remains undervalued while CHF remains overvalued. We expect CHF/JPY to weaken to 102 by year-end, from currently 116.8.
We are also short EUR/SEK, as we expect the ECB to do more than the Riksbank this year, in response to more severe deflation risks. Our target is 8.90.
We are long AUD/NZD, expecting it to reach 1.10 by year-end. We are also long AUD/KRW, targeting 920.
We have been expecting upside EUR/USD risks in the short term. The inability of the euro to weaken after the ECB flagged more easing last weak validating this view. However, we would expect further monetary policy divergence between the Fed and the ECB to further weaken the Euro later in the year and we would be selling EUR/USD rallies. Indeed, our vol strategist has recently argued that the prevalence of large EUR/USD options expiries may be supplying vast amounts of gamma to the market, keeping spot contained, suggesting that EURUSD could soon break out of its recent range when most of these options expire.
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