Trade the range in currencies
We expect most major currency pairs to trade within established ranges, providing an opportunity to boost portfolio income by selling volatility.
The US dollar has adjusted to a weaker level, as slowing US growth, fiscal stimulus in Europe, and concerns about US policy have weighed on the greenback. We favor using peak tariff concerns to reduce US dollar exposure. Directionally, we believe that the biggest opportunity is long the Japanese yen.
The US dollar has weakened significantly in the first quarter, driven by US growth and interest rate expectations falling relative to the rest of the world. The overall dollar index (DXY) is down 3.7% year-to-date, with the euro and the yen appreciating by 4.0% and 3.9%, respectively (as of 27 March).
Looking ahead, we see reasons for rangebound trading in the second quarter:
- Risks of weaker European currencies are fading... Ongoing tariff uncertainty and concerns about US policy impacts on growth and inflation suggest that EURUSD parity is unlikely. Even moves below 1.05 seem less probable and would likely be brief.
- 鈥ut we wouldn't chase the euro higher. Germany's generational shift in government spending has supported the euro's appreciation this year, but we believe the near-term听benefits are now priced in. The threat of reciprocal US tariffs poses a risk to export-driven European companies. Additionally, the euro, being one of the most sensitive G10 currencies to global growth, could be vulnerable in adverse tariff scenarios affecting global activity.
- Yield differential repricing appears complete. At the year's start, the ten-year interest rate differential between US Treasuries and German Bunds was 223bps, and the gap with Japanese government bonds was 350bps. Both have narrowed by around 70bps to 155bps and 276bps, respectively. We foresee less divergence in central bank policy rates, expecting 50bps of rate cuts from the Fed and ECB, and a 25bps hike from the Bank of Japan. By year-end, we anticipate lower yields in all three countries, with 10-year interest rate differentials remaining near current levels.
We expect the EURUSD to trade within its established 1.05-1.12 range, as seen in 2023 and 2024. Our EURUSD forecasts are 1.06 (June), 1.08 (September), and 1.10 (December). We would buy the EUR on dips toward the lower end of this range, as an earlier ECB end to its easing cycle while the Fed continues to cut rates may lead to EURUSD strengthening to the top of the range from the second half. We expect GBP and CHF to remain stable versus the EUR, though the franc's low interest rates may lead to poor total returns. We expect USDCHF to mirror EURUSD. We therefore foresee a USDCHF move toward 0.90, before later moving lower towards 0.85.
Currency market option volatility has increased, making volatility-selling strategies more appealing, especially for the CHF, where low yields and spot performance may struggle against implied forwards.
Our top three range-trading FX ideas are:
- Selling the risks of a lower EURUSD exchange rate with strikes around 1.05-1.06.
- Selling the risk of a stronger USDCHF rate around 0.90.
- Selling the risk of GBPUSD falling below 1.25.
For directional trades, we see the biggest opportunity in being long the Japanese yen, especially against the US dollar.
听
