USD, EUR, JPY, CHF, CAD, AUD, NZD: Weekly Outlook - Morgan Stanley
USD: Buy vs. the Funders. Bullish.
We expect some further legs in the current risk rally, which should keep the USD supported against the funders – EUR, JPY and CHF. Economic data out of the United States have been solid over the last week, with indicators of the labor market, domestic demand, and manufacturing all showing signs of resilience. However, with the Fed likely to remain on the sidelines for now after the sharp tightening of financial conditions to start the year, USD should in the near term lose ground against high yield FX.
EUR: Selling EURUSD Bearish.
We remain short EUR on both a tactical and structural horizon. Near term, the risk rally that we have been calling for is likely to pressure EUR lower, given that the common currency has evolved as the globe’s funding currency of choice. Medium term, the EUR should remain one of the weaker G10 currencies, given expectations for more aggressive policy easing from the ECB next month.
JPY: Tactical Bearishness. Bearish.
The asset outlook is key to determining the direction of the JPY. Indeed, with domestic stocks falling sharply post BoJ easing, Japanese investors needed to quickly scale back risk exposure. The easiest and most liquid way to perform such an operation is through the FX markets, hedging foreign exposure. As such, with risk markets recovering, this should limit the scale of foreign hedging. We are tactically bearish the JPY, looking for 116 in USDJPY in the coming weeks.
CHF: Still Buying USDCHF. Bearish.
Upside momentum is here for USDCHF and we target 1.03. The risk on environment should continue to support CHF weakness as Swiss investors look for stronger returns abroad. The local investment outlook remains and yield differentials still support investment outside of Switzerland. Our outlook changes if the European banking sector worries start again as this may prompt repatriation back to CHF.
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.
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. This week’s private capital expenditures report will be one of the most important data points to watch. Specifically, the ABS will be reporting a first look into firms’ capex intentions for the 2016-17 fiscal year – this is the number to focus on.
NZD: Weak Inflation Expectations. Neutral.
The divergence between rising iron ore prices and falling milk prices supports a higher AUDNZD. Inflation expectations have fallen to a low since 1994, supporting further RBNZ easing. The risk rally may however support NZDUSD further this week making trades for short NZD on the crosses more attractive. Longer term we are bearish on NZDUSD as suppressed milk prices reduces the incomes of farmers.
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