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

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

3 April 2016, 21:10
Vasilii Apostolidi

EUR: EUR to Range Trade. Neutral.

Yellen’s dovish speech has given support to EUR, pushing EURUSD through 1.14. We expect EURUSD could trade as high as 1.16/1.17 in a weak USD environment but expect the ECB will be uncomfortable with sustained strength near these levels. Core CPI was a positive surprise this week, though this may have been driven by the timing of Easter. In general, we don’t see a catalyst for EUR weakness in the short term and expect it to range trade near these levels.

JPY: Staying Bearish Tactically. Bearish.

We remain tactically bearish on JPY for two reasons. First, the new fiscal year starts this week, and we expect domestic investors to hunt for yield overseas on a currency-unhedged basis. Second, the dovish Fed and stabilising China data provide support for risk appetite in the near term, which reduces the demand for safe haven assets such as JPY. In this environment, we like selling JPY against high beta currencies such as ZAR, AUD and MXN.

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GBP: Selling Rebounds. Bearish.

Despite the recent decline in USD, commodity prices have not rebounded in a meaningful way, which continues to weigh on the UK’s investment income balance. Recent telephone polls also show a diminishing lead for the “Remain” camp, increasing uncertainty about Brexit. The potential political repercussions from a vote to leave the EU add to the uncertainty and put downward pressure on the GBP. We look for opportunities to sell GBP rebounds and expect volatility to remain high.

CHF: Driven by USD Weakness. Neutral.

USDCHF is likely to move lower this week, driven by broad USD weakness. The weakness could also drive EURUSD above 1.15, which would likely cause EURCHF to move higher. As investors start hunting for yield in a low rate environment, domestic investors will be looking overseas, driving capital outflows and weakening the CHF.

CAD: Manufacturing Rebound Taking Hold. Bullish.

Unemployment Strong data, rising oil prices and supportive fiscal policy will keep the BoC on hold and cause more CAD strength, we believe. January GDP growth released today showed the largest monthly gain in three years at 0.6% MoM with manufacturing leading the way. The BoC will be forced to upgrade their forecasts in the upcoming MPR given this print and the fiscal stimulus included in the most recent budget, supporting their hawkish tone. We like buying CAD against USD.

AUD: Temporary Stability. Neutral.

Better AUD data and rising iron ore prices have support AUD in the last few weeks. With USD broadly weak and risk supported, we expect AUD to remain around these levels. The key risk here is the RBA acting at next week’s meeting. The AUD TWI is nearing levels which the RBA is uncomfortable with, as evidenced by Stevens’ recent remarks. We don’t expect a cut, but there is a possibility the RBA includes some language on the exchange rate. Therefore, we remain neutral on AUD.

NZD: A New Regime. Neutral.

NZD has entered a new regime after breaking the 0.69 level on the back of Yellen’s dovish speech. In the near term, NZD may have more upside potential. With the Fed delaying a rate hike, the low interest rate environment and support for risk appetite make NZD attractive as it offers the highest yield in the G10 space. However, we remain cautious as the RBNZ is likely to be uncomfortable with the NZD TWI currently trading at a 3% premium to its June-16 forecast.

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