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

"USD: Cautious Correction. Bullish.

The dovish Fed minutes support our call for a cautious USD correction, as the market may adjust its timing of the first hike somewhat. Investors are likely to take profits on their long USD positions, providing an opportunity to re-enter longs. Indeed, our medium term bullish USD view remains intact as US growth continues to outperform. Once positioning clears out over coming days, we believe USD will resume its strengthening trend, particularly if next week’s slew of data releases are strong.

EUR: Sell on the Resolution. Bearish.

Upon the Greek resolution development, we would expect EUR to spike higher, providing cleaner opportunities to enter short positions. QE from the ECB has not yet begun, and while growth in Europe has picked up somewhat, it remains much less robust than that seen in the US. Interest rate and growth differentials should continue to pressure EURUSD over the medium term.

JPY: Room for Near-Term Support. Neutral.

USDJPY could see some pressure in the near term, due to a combination of outstanding political risk events and a more dovish set of Fed minutes. On top of this, Japanese yields have been rising, reducing the incentive for Japanese investors to put money abroad. All of this could spark a short-term correction in JPY. We prefer to be short EURJPY rather than long USDJPY, given our medium term bullish USD view.

GBP: GBP – Buy on the Crosses. Neutral.

While we expect some downside for GBPUSD over the medium term given our stronger USD view and the political risks for the UK over the coming months, there are some risks to this view. In the short term, GBP may benefit from the relative attractiveness of the gilt market, relative to euro area bonds which are rapidly turning into negative territory. While UK CPI is low at 0.3%, the BoE appears to be looking through this. We like selling EURGBP and buying GBPSEK. 

AUD: Domestic and External Pressure. Bearish.

Despite more dovish Fed minutes and supportive news flow, AUD was a relative EM underperformer this week, in line with our view for currency weakness. Concerns about China and scope for devaluation there should limit AUD strength, as should domestic concerns and scope for RBA easing. On this latter note, we will watch the upcoming capital expenditure print carefully, as weakness here could cement expectations of dovishness.

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