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

USD: Taking a Breath. Bullish.

US data remain soft as a result of seasonal factors and labor issues. On top of this, the Fed did not sound in a huge rush to hike rates at the latest meeting. This combination could lead to a USD pause ahead of payrolls. Over this timeframe, we prefer to play relative value trades and wait for dips in USD. However, we expect that growth will pick up and the Fed will hike, so we retain our medium-term bullish USD view, and would use dips to re-establish longer-term long USD positions.

EUR: Remain Bearish. Bearish.

We remain bearish on EURUSD and believe that it may begin to head lower after its brief pause following the FOMC meeting. Concerns about Greece remain and the latest round of European elections suggests a more fragmented political landscape, which could be reflected in the outcome of national elections in many countries at the end of the year. Political uncertainty is likely to weigh on EUR.

JPY: A Brighter Picture. Bullish.

We believe that USDJPY has scope to head lower in the near term. First, risk appetite has weakened due to political tension in the Middle East and valuation in equity markets. Second, we are seeing signs of reflation in Japan. Wages are picking up and the economy is strengthening somewhat. The combination of these two factors should pressure USDJPY somewhat, with JPY particularly attractive on the crosses. 

GBP: Remain Bearish. Bearish.

Over the coming week we continue to monitor EURGBP, expecting a technical correction higher. This is supported by low risk appetite causing investors to reduce inflows into the UK, keeping the currency weak. With CPI reaching a low of 0.0%Y, there is now an increasing risk that the UK dips into deflation in the coming months. While this supported retail sales, there could be a shift in sentiment from the BoE, supporting the view to sell GBPUSD on rebounds. Political risks also remain. 

AUD: Temporary Relief. Bearish.

We remain bearish AUD over the medium term but recognize that the USD pause could provide some support to higheryielding currencies such as AUD. It may also offer a moment of relief for Asia, which would further support AUD. However, over the medium term, we remain bearish. Our commodities team lowered its iron ore forecasts recently, not boding well for the longer-term outlook for AUD. 

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