USD, EUR, JPY, GBP, AUD: Outlooks For The Coming Week - Morgan Stanley

USD: Long Live the King. Bullish.

We expect USD to continue to outperform, despite some recent soft data. Indeed, while other economies are using currency depreciation to export deflation, most notably Singapore recently, the US continues to allow its currency to appreciate. The upcoming PCE print will be important, given it’s the Fed’s preferred measure of inflation, though we note that the latest meeting revealed no major changes in the central bank’s stance, and our bullish USD story remains predicated on growth, not rates.

EUR: Data Strength, but Not EUR Strength. Bearish.

Recent economic data in Europe have been somewhat more positive, but we are cautious that this is unlikely to drive EUR strength. We note that there are plenty of examples where strong data failed to support a currency, most notably in the US between 2009 and 2011. Indeed, as long as strength in economic data does not feed into higher inflation expectations, and bank returns in EMU remain low, we would expect EUR to remain offered.

JPY: Long on the Crosses. Neutral.

We believe JPY could strengthen on the crosses, though we are more cautious against USD. AUDJPY, NZDJPY and CADJPY look particularly vulnerable. With the surrounding Asian central banks looking set to ease further, there could be some relative support for JPY. Given the falling inflationary outlook, we will continue to watch the debate coming out of the BoJ. Indeed, Governor Kuroda has already stated that the BoJ may need to be creative with future monetary policy, given flat yield curves.

GBP: Political Risks to Build. Bearish.

We have revised our GBPUSD forecasts lower, given the increased disinflationary pressure, with risks of now heading into deflation as highlighted by the BoE’s Carney. In addition, the two members of the BoE who were previously voting for a rate hike now want to keep rates on hold. This, on top of political pressure in the coming months, should keep the medium-term downward momentum on GBPUSD. Services PMI will be watched since last month it showed signs of weakness.

AUD: Domestic and External Weakness. Bearish.

We maintain our call for AUD weakness, despite the upside surprise in the latest inflation print. Indeed, even with this print, markets are pricing in RBA easing, and the RBA maintains its view that AUD is overvalued, and should trade towards 0.75. In addition, without further easing in China, economic weakness could develop, with spillover effects to AUD.

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