USD, EUR, JPY, CHF, CAD, AUD: Weekly Outlook - Morgan Stanley

USD: Selective Pullback. Bullish.

We stick to our medium term USD bullish view but acknowledge that in the face of a disappointing ECB, EURUSD rallies could have a broader impact on FX markets, pressuring USD elsewhere. That said, we would expect high beta and EM currencies to remain weak against USD. The ECB’s disappointing outcome should weigh on risk appetite, as it reduces hope for a boost to global liquidity. We would remain long USD/EM, but are more cautious against G10 currencies.

EUR: The Magic Ends. Bearish.

Draghi’s decision to cut the deposit rate by only 10bp and extend the duration but not the size of the APP is likely to disappoint markets. There was an expectation that larger asset purchases would be announced, or at the very least, the door would be left open for further rate cuts. Without such a dovish outcome, focus is now on non-farm payrolls and the Fed, and EUR could see support into these events.

JPY: Gains on Crosses. Likely. Bullish.

We remain bullish JPY. The latest data from the GPIF has once again shown little change in the portfolio allocation weightings. This removes one the significant bearish factors for the JPY. In addition, inflows into the GPIF have been running lower, which also removes the need to sell JPY. We also believe the BoJ is unlikely to ease, which takes away another bearish driver of the currency. We like playing JPY strength on crosses.

CHF: SNB Watching. Bearish.

With the ECB undershooting market expectations and sending EURCHF rallying, the odds for the SNB cutting rates next week have been dramatically reduced. We expect the SNB to retain the same rhetoric next week unless EURCHF is trading at 1.05. We remain sellers of CHFJPY over the medium term due to the weak economic outlook and low investment returns locally that should send money abroad.

CAD: Watching the BoC. Bearish.

The BoC remained unchanged this week, and we believe they’re likely in wait and see mode, but will eventually have to acknowledge data weakness. The latest GDP print was lower than expected, and the current account has widened. Upcoming data will be important, especially trade. We remain bearish on CAD, particularly as markets are pricing in no probability of a cut, while we expect the BoC may have to take a more dovish bias going forward.

AUD: Waiting for the Rebound to Sell. Neutral.

We believe that the divergence between iron ore prices (falling) and AUD (rising) shouldn’t stay for long and so look for opportunities to sell AUDUSD. The RBA may be on hold for now but we believe there are bigger risks to come from the housing market. The proportion of houses being sold when brought to auction has come down significantly, an early sign that the house price rises may slow, which is bearish for the AUD."