EUR, JPY, GBP, CAD, AUD, NZD: Weekly Outlook - Morgan Stanley

EUR: Risk Events Galore – EU + ECB. Bearish.

We remain bearish on EUR and are seeing rising political risks as providing further evidence for the currency to weaken. Near term, the risk rally will add to downward EURUSD pressure, supported further by foreign corporate borrowing in EURs. The risk of the Schengen agreement being suspended at the EU meeting in Ankara on Monday shouldn’t be ignored. With a depo cut already priced for the ECB, focus will be on asset purchases.

JPY: Tactical Bearishness. Bearish.

The asset outlook is key to determining the direction of JPY. Rebounding local equities, supported by trust banks buying, should support USDJPY further. We still target the 116/118 area and should the ECB disappoint then would turn bearish on USDJPY again from the risk appetite angle. We continue to monitor the Japan security flow data for signs of whether the stronger risk appetite is keeping Japanese investors investing abroad and thus weakening JPY.

GBP: EURGBP Toppish. Bearish.

We remain bearish on GBPUSD into the June 23 referendum but see higher political risks brewing in the euro area that could support a turnaround in EURGBP. GBPUSD has now passed its ‘shock phase’ of the risk of a Brexit, in our view, and now the focus will be on the polls and position adjustment. We think that investors in UK assets will look to put on tail-risk hedges, with selling the currency forming the easiest method, and this should support the next leg down in GBPUSD.

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. The stronger-than-expected GDP print hit the bar for ‘good enough’ as the BoC awaits the March budget release with details on further fiscal stimulus. We don’t expect much from the BoC meeting on Wednesday. Oil prices and data deterioration remain key for picking a point when to short the CAD once again.

AUD: Supported by the Risk Rally. Bullish.

Iron ore prices in AUD have risen over 16% year to date. The rise in potential incomes for mining communities has helped to keep the currency supported. As China keeps the USDCNY fix relatively steady and equities perform well then we expect further upside for AUD: 0.74 has been our target for AUDUSD as this is the top end of the trend channel. House price rises kept consumers strong, supporting 4Q GDP. Our economists expect housing weakness later this year, a risk for AUD.

NZD: RBNZ in Focus. Neutral.

The divergence between rising iron ore prices and falling milk prices supports a higher AUDNZD. The strong global risk appetite should also keep NZDUSD supported, but we suggest keeping tight stops. The market is expecting the RBNZ to remain on hold this week but, with inflation expectations having fallen to a low since 1994, the dovish tone will likely remain. Dairy prices rose at the latest auction so these need to be monitored.

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