USD, EUR, JPY, GBP, CHF: Weekly Outlook - Morgan Stanley

USD, EUR, JPY, GBP, CHF: Weekly Outlook - Morgan Stanley

15 August 2016, 17:40
Vasilii Apostolidi

USD: Still Bearish USD. Bearish.

We believe USD positions will continue to unwind as weak US data put Fed rate hikes in doubt and the search for yield continues. US data remained poor this week with productivity numbers pointing to increasingly low potential growth for the economy.Copy signals, Trade and Earn $ on Forex4you -  

While some have argued this would make the case for earlier rate hikes, we believe this data will push the Fed to be more cautious in light of little inflationary pressures in the economy. We expect inflation and growth data to remain weak in 2H, ultimately forcing the market to price out hikes. As long as risk appetite remains supported, investors' search for yield continues and market pricing of rate hikes doesn't move much higher, we expect USD to weaken from here.

EUR: Expect More Strength. Bullish.

We expect EUR to stay supported. The results from a German ZEW study showed that EU banks have larger capital shortfalls than that indicated by the official EBA stress test, supporting our argument that EMU's financial institutions are unable to export long-term capital due to their weak balance sheets. This results in the commercial demand for EUR from the EMU's rising current account surplus dominating, helping the EUR stay supported. EURUSD has been relatively stable in the past week despite USD weakness, and we expect the pair to catch up with USD weakness. As such, we like buying EUR against USD and particularly against GBP.

JPY: Staying Bullish. Bullish.  

With the fiscal and monetary policy announcements out of the way (and with both having disappointed), we expect JPY to resume the upward trend against USD it has maintained since the beginning of the year. With the BoJ fuelling expectations that the negative interest rate policy may be lifted at its next meeting in a comprehensive review of its current policy, should nominal JPY yields continue to rise, real yields could increase further to strengthen JPY. FX hedging costs have risen (with hedged foreign bond yields, particularly USD, approaching 0), but we don't expect an offsetting increase in unhedged flows. We expect USDJPY to test the next chart levels of 100.20 and 99.05, targeting our forecast of 97 for the third quarter.

GBP: Front-loaded Weakness. Bearish.

GBP has broken below 1.30 for the first time since Brexit after the BoE’s McCafferty – one of the more hawkish members on the MPC – called for more monetary easing if the economy worsens. With our economists’ view that the BoE’s forecasts are too optimistic, this dovish stance supports their expectations of a second easing package in November. Our economists are calling for another 15bp cut, which is larger than market's current pricing of 10bp, suggesting there is room for further GBP weakness. GBP real rates and yields have also fallen to negative levels, making it unattractive in the current yield-seeking environment. We remain GBP-bearish and like selling against EUR and USD which we hold in our portfolio.*

CHF: Strength Against USD. Neutral.

We expect CHF to strengthen against USD. A large part of Switzerland's sovereign yield curve is in negative territory, limiting the room for nominal yields to fall further. With inflation still in negative territory, inflation expectations may fall faster than nominal yields, pushing CHF's real yields up to support the currency. On the other hand, we expect US real yields to decline, hence real yield differentials should push USDCHF down. We expect stability in EURCHF as EUR's real yields are also rising, and the upside in the pair may be capped by potential intervention from the SNB.

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