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BNP PARIBAS MARKETSCALL Summary

Core Content Overview

BNP Paribas released a weekly cross-asset market view on June 14, 2017, focusing on the USD and global currencies ahead of the Federal Reserve meeting. The report outlines the bank's expectations for the Fed's actions, currency movements, and market sentiment across various asset classes.

Key Market Views

USD Outlook

• Fed Policy: The Fed is expected to hike rates today, with a further hike later in the year. No concrete announcement on balance sheet reduction is anticipated at this meeting.
• Market Positioning: The USD is currently underpriced, with markets overly pessimistic about US economic growth and inflation. Financial conditions remain strong, and the Atlanta Fed's GDPNow model indicates $3%$ growth for Q2.
• USD Weakness: Despite potential rate hikes, the USD is weak due to the slower rebound of US growth compared to previous reflation periods and the lack of follow-through from new administration policies.
• Short USD Positioning: The USD is at a multi-year extreme short, suggesting a possible rebound if the Fed surprises on the hawkish side.

EUR Outlook

• Momentum: EUR has shown strong bullish momentum since the ECB announced QE.
• Valuation Risk: EUR is overbought and vulnerable to profit-taking due to long positioning and lower political risk premium.
• Supporting Factors: The EUR may face downside pressure due to ECB QE, a more hawkish Fed, and the narrowing of the 5y5y real yield differential.
• CLEER™ Model: EURUSD is expected to fall, with fair value at 1.01 by end-2017 and 0.99 by end-2018.

GBP Outlook

• Fair Valuation: GBP is fairly priced against the USD, but remains vulnerable to near-term downside risks due to political uncertainty.
• Inflation and BoE: The UK's inflationary pressure is largely FX-driven, and the BoE may maintain a dovish stance amid economic uncertainty.
• CLEER™ Model: GBPUSD is expected to trade in line with STEER™ fair value post-election, with a target of 1.42 by end-2017.

JPY Outlook

• Weaker JPY: The JPY is expected to weaken due to portfolio outflows and increasing interest rate differentials.
• FX Positioning: JPY positioning is neutral after a recent rally.
• CLEER™ Model: USDJPY is expected to rise to 117 by end-2017 and 134 by end-2018, with current levels at 110.2.

Key FX Prognosis Table

Fed Scenario Analysis

FX Market Dynamics

• USD: More sensitive to a hawkish hike due to its current cheap valuation against the 2y rate differential.
• EUR: Market's largest positions are long EUR and short USD, which could lead to a correction.
• GBP: Fairly priced but vulnerable due to political uncertainty.
• JPY: Expected to weaken as USD strengthens, with USDJPY trading above its STEER™ fair value.

Asian Currencies

• CNH, INR, IDR: Best long carry plays in the region due to high carry-to-volatility adjusted returns.
• FX Positioning: Neutral after a recent JPY rally, suggesting potential for further USD strength.

CLEER™ Model Summary

• CLEER™: A fair value model for G10 exchange rates based on economic fundamentals and regression techniques.
• USDJPY: Expected to rise to 117 by end-2017 and 134 by end-2018.
• GBPUSD: Expected to trade at 1.42 by end-2017, with a neutral outlook.
• EURUSD: Expected to fall to 1.01 by end-2017 and 0.99 by end-2018.

Dial-In Numbers

Password: 'The BNP Paribas Markets Call'

Replay Numbers

Contacts & Legal Notice

• Robert McAdie: Global Head of Strategy Research, 44 20 7595 8885, robert.mcadie@uk.bnpparibas.com
• Pierre Mathieu: Cross-Asset Strategist, 44 20 7595 8730, pierre.mathieu@uk.bnpparibas.com
• Michael Sneyd: Macro Quantitative Strategist, 44 20 7595 1307, michael.sneyd@uk.bnpparibas.com

Important Notes:

• This document is non-independent research and may be subject to conflicts of interest.
• It is a marketing communication and not investment research.
• It is not suitable for all investors and should not be relied upon for investment decisions.
• The information and opinions are based on public sources and may not have been independently verified.