EUR, JPY, GBP, CHF, AUD, CAD: Weekly Outlook - Morgan Stanley
EUR: Draghi’s Time to Shine.
All eyes will be on the ECB this week, as front end rates have been a key driver of the currency. We expect further rate cuts from the ECB, as well as an increase in QE. Removing the ‘floor’ on the deposit rate should open up scope for even more easing in the Euro Area, which should add to EUR weakness. Indeed, this would make EUR even more attractive as a funding currency.
JPY: Gains on Crosses Likely. Bullish.
We remain bullish JPY. Despite surging front-end rates in the US, USD/JPY has only reluctantly moved higher. Declining AUM in Japanese pension funds should provide structural tailwinds for JPY, as foreign holdings have to be reduced. Moreover, the BoJ has become more reluctant about further easing, pushing out the timing for reaching its inflation target and putting the emphasis on the fiscal side. We like playing JPY long on the crosses.
GBP: BoE Supporting Weaker GBP. Bearish.
We continue to hear a dovish tone from the BoE, which is keeping GBP under selling pressure. Fiscal tightening and a looming Brexit debate could also support our bearish currency view. GBP/USD remains sensitive to global risk appetite and rate differentials. Core inflation rising last month is not enough to support GBP we believe, and we favour selling on rallies. This week, we will be watching the GDP and business investment data for any signs of slowing, indicating heightened Brexit concerns.
CHF: Surpassing Pre-Floor Levels. Bearish.
USD/CHF briefly surpassed its high before the EUR/CHF floor was removed, and we still believe that the CHF has upside momentum. Aggressive ECB policy in December may support the SNB cutting rates further in coming months if it sees a risk to EUR/CHF falling too fast. The SNB’s Jordan has emphasized the need to keep monetary policy divergences to weaken the franc. The 3Q GDP release will be in focus this week.
CAD: Watching the BoC. Bearish.
We remain bearish on CAD. The recent fall in oil prices will have a lasting negative impact on the economy, and the central bank may need to respond. Indeed, the rebound seen in the non-commodity sector is fizzling out, evident in manufacturing data and non-commodity exports. With further easing not priced in yet, the currency could weaken if the BoC is forced to take a more dovish tone. We entered a long USD/CAD position last week.
AUD: AUD Tactically an Outperformer. Neutral.
AUD has proven remarkably resilient given the recent decline in its terms of trade. This is largely due to a more constructive outlook from the RBA and the pricing out of expected easing. As Chinese data respond to fiscal and monetary stimulus, expect AUD to continue its outperformance against its commodity currency peers in NZD and CAD. Next week will bring plenty of important data including GDP, which will help us evaluate Australia’s ongoing transition away from the resource sector towards more sustainable growth.
