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

USD: Dollar Data Dependence. Bullish.

We stick to our medium-term bullish USD view, but see scope for a pause in the near term, given the more dovish shift in the Fed. In line with our economists’ view, the central bank suggested it is still data dependent and sees risks as skewed toward moving too early, rather than too late. With data coming in soft, markets may push back their timing of the first hike. We prefer relative value trades in this environment.

EUR: Remain Bearish. Neutral.

We believe EUR could see some relief in the near term as USD broadly takes a pause. Signs of reflation in Europe and a positioning clear-out could lead to some retracement. We have not changed our longer-term bearish view, however. With the ECB purchasing sovereign bonds on a large scale, yields in Europe should fall and EUR should transition into a funding currency.

JPY: A Brighter Picture. Neutral.

JPY could be a relative outperformer over the next few weeks. With USD on the sideline, JPY is attractive on the crosses given reflationary signs and a central bank that is taking a more hands-off approach. Much of the rebalancing into foreign investment has already occurred, which should also limit JPY weakness. Finally, with growth soft in the rest of the world, there is also scope for JPY to receive a safe haven bid.

GBP: Selling on Rebounds. Neutral.

We reached our initial target of 1.47 on GBPUSD shorts and with a technical pause expected for the USD, we see risks of a rebound, but this should be limited. For GBPUSD, we use any rebounds as selling opportunities since data has been coming in weak, and the political risks are still high. The CPI print will be very important for GBP this week. Price rises remain low in the retail sector and with wages not rising as much as expected, there are risks that CPI undershoots, affecting rate expectations. 

AUD: Temporary Relief. Bearish.

We remain bearish on AUD over the medium term. However, the USD correction could support China somewhat, boosting the quasi-China trade. On this front, we would expect AUD could see some support over coming weeks. We believe the best way to trade this is by being patient and waiting for opportunities to short. Should US data start to improve, we would expect AUD to begin weakening once again.

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