In an exclusive video for FX Week, John Hardy, chief FX strategist at Saxo Bank in London, shares his outlook for the G-7 currencies over the months ahead, highlighting key risks in the eurozone and Japan.
Hardy says that as Spain receives greater attention from markets, the next few months will present a challenge for the European Central Bank (ECB). To date, the ECB did well to contain spikes in peripheral sovereign yields through its long-term refinancing operations (LTROs) in December last year and February.
"[However], if Spain goes into difficulties, the ECB will have a hard time going it alone as it did with the LTROs. We'll need to see more of a political co-ordination," says Hardy.
To that end, Hardy expects the new French leadership to drive change and the EUR/USD up, but warns there might be a reversal at the 1.35–1.36 level.
Similarly, Hardy is expecting the yen to consolidate ‘robustly' against a number of currencies, having been deployed as a funding currency in the carry environment. He says the unit has not only moved because of a drop in volatility in a number of FX crosses, but also as a result of a Bank of Japan meeting in mid-February, in which it gave an aggressive message of wanting to see positive inflation in the country.
"This caused the yen to weaken considerably. But it looks to me like in the next few months, this yen move will be overshot, and we will see a bit of a consolidation in these carry trades, which will mean the yen consolidates robustly against several of these currencies," says Hardy.
Elsewhere, Hardy says Swiss authorities are unlikely to raise the ceiling on the Swiss franc until the third quarter and beyond, while the Australian dollar could represent one of the higher beta currencies in light of current themes such as a Chinese slowdown.