From Morgan stanley insights :

Positioning and technical USD:

EURUSD is leading the way on the direction for the USD within the G10 space. Markets starting to get worried about peripheral spread widening have sold the EUR, which was previously not responding to the rates markets. A break of the 50DMA around 1.06 will provide significant downside momentum for this pair. The sensitivity of G10 currencies to peripheral spreads is still an evolving story as, until the start of this week, EURUSD was rising in line with peripheral spreads. That relationship is now turning negative and we think will stay negative for a while. USDJPY is still hovering around the 112 level, keeping us with a long bias. Flow data out overnight shows that the Japanese reduced their selling of foreign bonds last week and picked up foreign equity buying. FX investors should continue to watch the US treasury market, which according to CFTC data is showing record shorts positions and the US 10y is approaching its recent low at 2.3036%.

G20 and G7 currency discussions:

As markets continue to watch for any currency-related comments from US president Trump we are also watching for comments out from other parts of the world. Germany has now abandoned an effort to push the G20 towards backing tighter monetary policy to promote global financial resilience, indicating that monetary accommodation from the ECB
or BoJ is unlikely to be taken away anytime soon. In fact, France’s Challenges magazine reported yesterday that Draghi sees the ECB maintaining an accommodative policy until the end of his mandate in October 2019. Formal meetings are far away (G7: May 26-27, G20: 7-8 July) but currency and monetary policy comments from governments will continue to be closely watched.

BoJ’s thoughts on the curve:

In fact this morning Abe has said he will propose to Trump that he should discuss currency issues at the G20 and G7 meetings. In addition, the BoJ’s Nakaso has said that the central bank should continue the current powerful easing. What appears to be a new comment is that he thinks the shape of the current yield curve is appropriate. That may be a sign for markets that current levels of JGB yields will be defended by the BoJ and that they think this is an appropriate level of yields to help banking sector profitability. An alternative take on this comment could be in relation to the currency. The 2s10s curve in Japan has risen largely in line with the US curve.
USDJPY has generally followed in line with the nominal 2s10s differential. If USDJPY moves below 110 we will likely start to hear sound bites saying that the government is watching the exchange movements rate closely. Those sound bites seem to have lost their effectiveness in the market but are still important, especially in the run-up to discussions between the Japanese government and
the new US administration.

RBNZ on hold for now:

NZDUSD has weakened over 1.5% overnight as the RBNZ told the markets they are not looking to hike this year. Ahead of the meeting, FX investors were long NZD and rates markets had priced a 75% probability of a 25bp hike this year. Now markets are pricing a 55% probability, causing the currency to weaken. The bank repeating its comment on the currency, “a decline in the exchange rate is needed”, is unlikely to have been a major market driver.With the dairy auction being lacklustre this week and extreme long NZD positions still in the markets, we think there could be a bit more downside for the currency. The downside should, however, be limited since economic data and inflation are generally on a good track.

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