USD, EUR, JPY, GBP, CAD, AUD, NZD: Weekly Outlook - Morgan Stanley
USD: Buy vs. the Funders. Bullish.
We expect risk appetite to pick up this week, which should keep the USD supported against the funders – EUR, JPY and CHF. Of course, it is important to keep an eye on the tightening financial conditions that are having an impact on Fed decisionmaking. That said, while news out of the US can drive USD fluctuations around the long-term upward USD trend, it cannot reverse the trend itself, we think. Rather, repatriation flows away from a quickly slowing emerging world will continue to dominate the bigger dollar direction.
EUR: Selling EUR/USD. Bearish.
Should the tactical rally we foresee occur, it would put pressure on EURUSD once again. This would likely ease Eurozone inflation expectations slightly but probably won’t prevent noise about potential ECB action in March. Remember, the correlation between EURUSD and equity markets remains strong and we expect the correlation to continue while there are outstanding FX hedged equity positions in the markets.
JPY: Tactical bearishness. Bearish.
We think the BoJ may try to use verbal intervention to stop the appreciation of the JPY. Domestic fund managers have seen their foreign holdings depreciate due to a combination of a stronger JPY and weaker global equity markets. This deterioration has occurred when holdings of foreign assets are at record highs, which could mean that stops are triggered and repatriation of holdings is forced. The BoJ attempted to push back against this by introducing negative rates, but failed. We believe the BoJ will act as a circuit breaker, stopping the JPY appreciating this week.
GBP: Waiting for the Rebound to Sell. Neutral.
Any risk rally in equities or oil is likely to provide GBP with a boost. We don’t expect this to last long though, so continue to promote selling on rallies. The BoE remains dovish and the Brexit debate is in full swing in the press. The UK’s current account deficit makes the currency prone to weakness when inflows are reduced due to high market volatility. EURGBP this week broke previous highs, supporting the upside momentum in this pair.
CAD: A Temporary Respite. Neutral.
We believe that CAD may see a temporary respite in an environment of a more cautious Fed and preliminary signs of strength in the non-resources sector. However, our medium-term narrative remains unchanged. The great rotation that the BoC has been hoping for is still questionable. Moreover, the Business Outlook Survey showed the weakest hiring and investment intentions since the crisis. As such, short CAD against AUD this week.
AUD: Picking Up Carry. Bullish.
The Chinese authorities have brought back a period of calm, keeping the USDCNY fix stable over the past week. Coupled with liquidity injections ahead of the Lunar New Year, this dampening of volatility is likely to temporarily support carry trades. From a fundamental perspective, Australian inflation and growth numbers both surprised to the topside too. And the RBA was less dovish than previously. Consequently, we believe that AUD can continue to outperform in the near term.
NZD: Watching Volatility. Neutral.
We think that volatility is going to remain the theme in global markets. As part of this, NZD being a less liquid G10 currency is likely to see many ups and downs in relation to position adjustment and risk appetite. The local economic story however has not changed. Milk prices are suppressed, reducing the incomes of farmers and low inflation may make the RBNZ shift to a more dovish tone. We would use rebounds to sell NZDUSD and watch the inflation survey this week.
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