From UBS's 'Global FX Strategy' research note:

In brief (bolding mine)

EUR/USD:

  • Monetary policy divergence between the Fed and ECB should further widen rate differentials at the front end of the curve
  • This should continue to act as a weight on the euro
  • But our conviction in the risk-reward of being short EUR/USD at these levels is lower than it has been in the recent past

Long USD/JPY:

  • Long USD/JPY remains our favourite FX trade, based largely on the view that Japan specific factors will continue to weaken the yen
  • "we still believe the long USD/JPY and Nikkei trade will perform well into Q2, feeding off two critical drivers - further BoJ easing and a stronger portfolio rebalancing effect among Japanese investors." ... key drivers of yen weakness

Expect some further dollar appreciation, but greater performance dispersion among the major dollar pairs

  • Long dollar positions should be chosen more selectively ... In particular, we think long USD positions should be focused against currencies where central banks are likely to ease policy by cutting rates or by targeting the currency directly
  • Central bank easing will be more differentiated going forward, and is likely to see the greatest impact in JPY, SEK, and CHF ... "With disinflationary pressures persistent in the global economy, we think it makes sense to be short currencies from small open economies where policy rates are at or below zero, and inflation remains very low. In such cases, currency weakness is a logical policy response and outcome. CHF and SEK both fit this profile well. The Riksbank's surprise rate cut and QE expansion likely had SEK in mind, as they had clearly warned the exchange rate was a risk. While short of outright intervention, we think it was explicitly directed at the krona, and is consistent with the importance of the exchange rate for monetary policy in such a small, open economy."

Look for opportunities in non-USD crosses

  • We expect oil-exposed NOK and CAD to outperform AUD, where the capex investment cliff should prevent meaningful recovery
  • Clear divergences in policy prospects are also beginning to emerge, and should support these views as well.
  • Short AUD vs. CAD, NOK, and NZD

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Note - dated April 2