EUR, CHF, GBP, CAD, AUD, NZD: Weekly Outlook - Morgan Stanley
EUR: Dovish ECB. Neutral.
The ECB was more dovish than expected, leaving growth and inflation forecasts for 2017/18 unchanged despite higher oil prices, underlining concerns about future growth prospects. However, this supports our risk-bearish view, which will keep EUR supported due to inflation expectations falling faster than nominal yields, resulting in rising real yields. Given our expectations for USD appreciation, we believe EURUSD will continue to range trade, and would prefer trading the currency via long EURGBP positions.
GBP: Bearish Reversal. Bearish.
Recent GBP weakness has been driven by a turnaround in the latest Brexit poll results, which we believe will remain volatile in the run up to the referendum. However, we stay bearish on GBP for structural reasons. First, recent UK economic data has remained sluggish. Second, we expect commodity prices to come under pressure, which does not bode well for GBP given its high positive correlation with commodity prices. We like expressing our view through selling GBP against EUR and USD.
CHF: Focus on Risk. Neutral.
Given our risk bearish view, we expect CHF to appreciate helped by rising real yields and its status as a safe haven currency. With many upcoming European risk events in June, including the German Constitutional Court ruling on the OMT, EU referendum and Spanish elections, we look for opportunities to sell EURCHF. We expect USDCHF to remain driven by the USD leg determined by the markets' repricing of a Fed rate hike.
CAD: Fade CAD Strength. Bearish.
We maintain our bearish view on CAD following the BoC meeting as we believe it was not as hawkish as the market took it and expect further economic weakness will cause markets to price a higher chance of rate cuts. The BoC did not have a large shift in tone, but some dovish changes on capex and the wildfires open the door for a larger shift at the July meeting (which is accompanied by an MPR). Canada's rotation away from the resource sector is in doubt, with weak March trade showing non-commodity export volumes falling an additional 2% after their nearly 5% fall in February. This week's poor GDP data points to a weak 2Q and we are watching tomorrow's trade data closely for signs of further deterioration.
AUD: RBA Easing to Push AUD Lower. Bearish.
We remain bearish AUD and expect the RBA easing to push AUD lower. We believe the market overreacted to the RBA minutes, and the SMP makes clear that the RBA stands ready to act further, given the very weak inflation trend. Given the worrying inflation trend, falling house price growth and iron ore prices resuming their downward trend, our economists are now expecting 75bp more rate cuts. RBA Governor Stevens' comments last week echo our view that the RBA will gladly watch AUD depreciate in order to help the difficult adjustment, and the underlying details of this week's GDP print point to still weak nominal growth which is largely being supported by housing related demand. We continue to like holding AUD short positions.
NZD: Looking to Sell. Bearish.
We like selling NZD in this current USD rally as we expect high-carry commodity currencies to underperform. NZD has benefited in recent days as the RBNZ's financial stability report pointed to rising house prices as a risk and pointed to the possibility of more macroprudential policies. While this, along with some better-than-expected data, has caused the market to price out the probability of RBNZ cuts, we expect this to reverse. However, we don't think macroprudential policies will preclude the RBNZ from cutting, given New Zealand's pressing inflation problem and that the elevated NZD TWI remains too high. With our expectation for commodity prices to fall as well as the RBA's recent dovish turn, we believe the RBNZ will stay dovish and limit currency strength.