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

USD: Catalysts to Become Bullish. Neutral.

We think the current USD fall will run out of steam. The catalysts for a turnaround back to a USD rally will be either strong US data confirming the need for tighter monetary policy in the US this year or other central banks globally fighting back against their own currency strength. In the short term FX rates can be influenced by central bank action but longer term it’s about the growth outlook relative to the rest of the world.

JPY: Staying Bullish. Bullish.

USDJPY made a new multi-year low on Thursday. We think that USDJPY had potential to fall further but on expectations that weakness in risk appetite will re-emerge. Recently Kuroda tried to use verbal intervention when JPY was strengthening, by keeping the option of further negative rates open. The impact was limited. Overall, the undervaluation of JPY and repatriation flows by pension funds for an ageing population should also support the currency.

GBP: Use Rebound to Sell. Bearish.

GBPUSD trading close to the 1.45 ‘pre-Boris’ level is a position adjustment rather than a fundamental shift in view on the UK. GBP is a highly risk-sensitive currency, so as risk appetite turns around in the coming days we expect GBPUSD to start to decline once again. The BoE was more neutral on rates this week and didn’t see a member opting for a cut. The Brexit risks should remain an undertone for the currency. Retail sales will be in focus this week.

CHF: EURCHF Range-Bound. Neutral.

Negative risk sentiment could limit the downside for CHF and, with the SNB remaining on hold, there doesn’t seem to be an immediate currency-weakening catalyst. When the USD rally resumes in earnest then we would look to enter long USDCHF positions again, but not for another few days. The SNB lowered its inflation profile but saw no need to cut rates in the immediate future.

CAD: Better Data but Oil-Dependent. Neutral.

USDCAD is driven largely by the oil price, but the rapid weakness we saw in December-January is probably not going to be seen for a while as the BoC is less likely to cut rates in response to lower oil. Stronger-than-expected manufacturing sales figures have pointed to a resilient economy. Limited fiscal stimulus is expected to be announced on March 22.

AUD: Central Bank-Driven Weakness. Bearish.  

Rebounding iron ore prices and stronger-than-expected labour market data have provided support for AUD. The issue for the RBA is whether AUD strength is now hurting the competitiveness of exporters. We believe that the RBA is a central bank that has room to cut if it wishes, unlike some other global banks we follow that have already adopted aggressive easing policies. We have added a limit order to short AUDUSD to our portfolio.

NZD: More Pain to Come. Bearish.

NZDUSD is approaching the top end of the range at 0.6880, last seen in December. In a risk-negative environment, the less liquid NZD should see the most downside in the G10. The downside should be supported by an accommodative central bank that may push back against currency strength. Note that the NZD TWI is trading over 4% higher than the RBNZ’s latest forecast. Milk prices and inflation expectations are expected to remain low.

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