EUR, GBP, CHF, CAD, AUD, NZD: Weekly Outlook - Morgan Stanley

EUR: Temporary Strength. Bullish.

We are tactically bullish on the EUR despite the ECB essentially preannouncing further easing measures in March. A lot is already priced into the curve, with the markets currently expecting a 10bps reduction in the deposit rate from Draghi. Additional QE we do not think will be sufficient to bring the EUR materially lower. In order for the ECB to have a significant impact on the common currency, it will need to change expectations for the cost of funding. And currently, there seems to be strong resistance against bringing the deposit rate much lower. 

GBP: Need to Watch Oil And Volatility. Neutral. 

GBP is one of the most sensitive currencies to volatility in the G10. Its sensitivity to oil prices has also increased over recent weeks as the UK equity market is heavily exposed to commodities. If risk appetite picks up this week in commodity markets then we could see GBP rally. However we would use this rebound to sell because the longer term issues still remain for the economy. We will be watching the conversations between David Cameron and the EU closely for a potential referendum date.

CHF: Selling CHF. Bearish.

A risk rebound should add further momentum to the weakening CHF. Our bearish story, however, goes beyond the global economic outlook. Swiss 10 year bond yields remain below zero suggesting that pension funds and asset managers may have to look abroad for stronger returns, which would weaken the CHF. We continue to monitor the sight deposit data to see if the SNB has been intervening. We think the SNB prefers this method of easing over cutting rates in response to the ECB.

CAD: A Temporary Respite. Neutral.

We believe that CAD may see a temporary respite in an environment of stabilizing oil prices and a more cautious Fed. However, our medium term narrative remains unchanged. The great rotation that the BoC has been hoping for isn’t happening; manufacturing and non-commodity trade finished 2015 on a soft note and have shown little signs of rebound. Moreover, the Business Outlook Survey showed the weakest hiring and investment intentions since the crisis. We expect the BoC to shift toward a more dovish stance later this year, catalyzing more CAD weakness.

AUD: Picking Up Carry. Bullish. 

Chinese authorities have brought back a period of calm, keeping the USDCNY fix stable over the past week. Coupled with liquidity injections ahead of the lunar new year, this dampening of volatility is likely to temporary support carry trades. From a fundamental perspective, Australian inflation and growth numbers both surprised to the topside too. As such, this week we enter into tactical AUD longs against CHF.

NZD: Responding to Risk. Neutral.

The New Zealand economic outlook doesn’t seem to be picking up. Inflation is low, Fonterra has reduced its payout to farmers and milk auction prices continue to fall. Supported by a dovish RBNZ, there seem enough reasons to be short the NZD for the medium term. This week we would wait for the rebound to sell as risk appetite being supported should help the carry currencies. A better short postion would be against the AUD, which has broken out of its trend channel.\

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