USD, EUR, JPY, GBP, CAD, AUD, NZD: Weekly Outlook - Morgan Stanley
USD: Buy vs. the Funders. Bullish.
We expect some further legs in the current risk rally, which would likely keep the USD supported against the funders – EUR, JPY and CHF. Economic data out of the United States have been resilient, assuaging concerns about a US recession. 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. MS tightened the stops on some of its current FX positions such as its short EUR/USD from 1.1360. The trade now has a revised profit-stop of 1.1150 and a target of 1.0700.
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.
GBP: Brexit in Play. Bearish.
We use any rebounds in GBPUSD to sell. GBPUSD has seen its initial downward “shock phase” as markets realise there is a non-zero probability of a Brexit. The second leg of GBP downtrend will be based on investors in UK assets looking to put on tail-risk hedges, with selling the currency forming the easiest method. Last year, foreigners had piled into gilts and sovereign wealth funds into UK real estate. Finally, a weak currency may increase hedging needs, pushing GBP towards 1.30.
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. This week’s trade data will be key in testing our thesis; we will be watching not only the headline number, but also the breakdown between resources and non-resources.
AUD: Picking Up Carry. Bullish.
The Chinese authorities have brought back a period of calm, keeping the USDCNY relatively steady. This dampening of volatility and a supportive risk environment is likely to temporarily boost carry trades. This week’s first look at private capital expenditures for the 2016-2017 fiscal year were significantly worse than expected, yet AUD was able to hold steady through it. This suggests that the direction of least resistance in the near term is for a higher AUD.
NZD: Risk Driven. 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. This week the Finance minister was calling for further rate cuts.
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