Weekly forecast - page 20
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Morgan Stanley on USD, EUR, JPY, GBP, CAD, AUD, NZD for the coming week
The Fed was dovish enough to support our weak USD view. The focus now shifts to the upcoming data which we expect will once again be worse than the Fed is hoping for and will prevent the Fed from hiking in December. Even if the Fed does hike, we expect it to be a compromise between the hawks and doves which is accompanied by dovish guidance about future hikes. We like selling USD against EM and G10 commodity currencies which are more likely to benefit from a dovish Fed and low G4 yields. A risk-off environment is another key risk to our view but we don't see any imminent catalysts to derail the risk rally.
EUR: Staying Bullish. Bullish.
We stick to the long EURUSD position* in our portfolio to express our bearish USD view. The low EMU yields and flat yield curves have hit banks' profitability, reducing their willingness to absorb foreign FX risk. This has resulted in banks closing and repatriating their foreign loan books which is EUR-supportive. Banks' foreign loan books growth has also slowed, indicating that long-term capital exports are insufficient to offset the commercial demand for EUR arising from the EMU's current account surplus. This, coupled with the ECB appearing to be on hold for now, supports our bullish EUR view. This week, we watch German Ifo and CPI.
JPY: USDJPY Lower For Now. Neutral.
The BoJ's change to its monetary policy framework this week is unlikely to change the near-term outlook for JPY as it still maintains NIRP and low long term interest rates as the BoJ policies. We think USDJPY can fall amidst a weak USD environment and no imminent catalyst for change in Japan. We think that for JPY to weaken significantly, higher inflation expectations are necessary to drive it. Further action by the MoF can be one way to improve the outlook.
GBP: Turning Cautious. Bearish.
While the demand side of the UK economy has held up better than expected post-Brexit, we have become more cautious on GBP. The latest BoE agents' survey reported that companies' investment intentions have fallen, supporting our view that UK growth will be weighed by the supply side of the economy, which will take a few quarters to be reflected in the economic data. Investors have also turned their attention back to Brexit as the government's negotiation position remains unclear, with risks tilted towards a hard Brexit which will significantly reduce the UK's access to the EU market. We prefer expressing our bearish GBP view through buying EURGBP.
CAD: Bearish Supported by BoC. Bearish.
We remain bearish on CAD, with the latest change in the BoC's stance adding support to our view. In its latest meeting, the BoC stated that inflation risks have tilted somewhat to the downside and growth may be somewhat lower than anticipated in July, softening the hawkish tone that it had been adopting so far despite weak economic data. This increases the possibility of the BoC cutting rates this year, especially since we are skeptical that exports can rebound enough in the second half of the year for the BoC to hit its forecasts. Given the markets are only pricing in 4bps of rate cuts for this year, and CAD has the largest long positioning in G10, we think further data weakness could weaken CAD significantly.
AUD: Further Upside. Bullish.
We think AUD has further room to appreciate against USD if risk remains supported as decent data is enough to keep the RBA on hold and investors seeking higher yielding assets. RBA assistant Governor Kent struck an upbeat tone this week and better than expected GDP growth (though with a mixed breakdown) as well as a falling UE rate are good enough to limit the risks of RBA rate cuts, despite a still worrisome inflation outlook. The RBA accord signed by new Gov. Lowe also emphasized their ability to take into account financial stability concerns when making monetary policy. With AUDUSD at 0.76, it still has room to go higher before the RBA becomes too worried about overvaluation.
NZD: RBNZ Not Stopping NZD Appreciation. Bullish.
The more dovish than expected RBNZ will not be enough to stop the upward NZD trend, in our view. The RBNZ changed its statement very little yesterday despite improving growth data and milk prices and also pointed to slowing house price appreciation. Nonetheless, we believe only an aggressive easing cycle will change the trend in NZD and we won't get more clarity on this until the November MPS. Inflation remains low, but even if the RBNZ does small amounts of easing, it is difficult for the central bank to weaken the currency in a time when markets are looking for anything high yield. . However, NZD remains vulnerable to a risk-off period.
EUR/USD: Struggle Between Bulls And Bears Drags On: Levels & Targets
Since EUR/USD bottomed at 1.0462 in March 2015 it formed a broad consolidation triangle (A-B-C-D-E, green) which could be complete as the market stalled right around its projected E-wave target at 1.1347 (int. 61.8 %) five weeks ago.
Following this view, any bounce should now be capped at 1.1309/28 (minor 76.4 %/daily triangle).
Only a break above the latter would re-open the upside for an extension to the next higher T-junction at 1.1426/50 (pivot/int. 76.4 % on higher scale).
Below 1.1309/28 though, we see a negative bias prevailing and the market at risk of at least testing key-support at 1.1049/37 (int. 76.4 %/daily trend).
A break below the latter would finally challenge the key-T-zone on big scale at 1.0782/10 (int. 76.4 %/pivot).
A break below the latter would resume the long-term downtrend in favor of an extension to 1.0072 and possibly to 0.9652 and 0.9298 (wave 3 projections).
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Week Ahead: USD Strength Into Payrolls & EUR Safe Haven Appeal
The OPEC deal to cut production for the first time in eight years provided a boost to oil prices and risk sentiment. Also supportive were the waning prospects for a Trump win at the November presidential election after the first televised debate. Last but not least, more upbeat Fed rhetoric and US data of late does not seem to translate into growing rate hike expectations, and thus it is a worry for the markets. Demand for carry and commodity currencies remains in place for now but we are not convinced that their gains can be sustained from here.
Indeed, abating pre-election risks and recovering oil prices should strengthen the case for a Fed hike in December. Next week's non-farm payrolls and manufacturing ISM could become triggers of renewed USD strength.
CAD’s recent outperformance is starting to fade and the currency looks vulnerable ahead of the Canadian labour data next week, which could add to the stream of disappointing releases of late.
AUD has benefited from the recent rebound in sentiment and the upcoming RBA meeting need not stand in the way of further resilience especially if the policy statement echoes recent comments by Governor Lowe that the bank will not 'overreact' to the weaker Australian inflation data of late. If anything, we prefer to express any constructive AUD vs its antipodean counterpart NZD.*
EUR came under pressure on the back of market woes about Deutsche Bank. A potential escalation of investors’ fears about the banking sector’s outlook could become a drag on EUR vs USD, JPY and CHF, given its growing correlation with the Eurozone bank stocks. That said, EUR’s safe haven appeal should shine through eventually and limit the downside risks. As argued in the editorial, the single currency is supported by, among other things, the unwinding of short-EUR hedges as foreign investors try to flee the Eurozone capital markets. European risk-correlated currencies with close ties to the epicentre of the turmoil, like Scandies, could struggle to perform as well.
Fears about a ‘hard Brexit’ as well as bank stock underperformance have weighed on GBP of late. While the Conservative party conference (2-5 October) could shed some light on the Brexit deal pursued by PM May, investors may be left guessing for now. With no escalation in the Brexit threat imminent, the risks ahead of the upcoming UK data could be tilted to the upside for GBP. We expect evidence of stable UK growth to dampen expectations of further BoE easing and support GBP.
USD: to remain range bound. Neutral.
US data has improved significantly over the last few weeks and is likely exceeding the low bar the Fed set for a December hike. Given election uncertainty, we expect markets to continue to price a December hike as the likely outcome but not deviate far from current pricing. In this environment, we would expect USD to continue to appreciate against JPY and some other G10 currencies but remain largely offered against EM. Ultimately, it will be the data over the next 2 months which will prove decisive on whether the Fed ultimately hikes in December.
EUR: Watch Banks and Inflation. Bullish.
We stay bullish on EUR. In ourview, worries about the European banking sector are actually bullish for the currency as it may lead to EMU banks liquidating their foreign assets and bringing the money back home. Recent ECB commentary has also cautioned about low/negative interest rates, suggesting that there may be few cuts left in the ECB's toolbox. Global and EMU inflation also ticked up in September which, if sustained, could lead to a reduction in the pricing of ECB rate cuts (10bp cut priced by end 2017), providing support for the currency. We remain long EURUSD in our portfolio*, which is forming a triangular structure with the upper end around 1.1240 and lower end at 1.1150.
CHF: SNB Keeping EURCHF Range Bound. Bullish.
We expect worries around the EMU banking sector to give CHF a strengthening bias, but with the SNB standing ready to intervene, the downside for EURCHF is likely to be limited to 1.0750, keeping the pair within its 1.0750-1.11 trading range. Even though Switzerland's CPI has recovered in 2016, we do not expect the SNB to change its policy anytime soon, given the SNB lowered its 2017 and 2018 inflation forecasts in its last statement and the IMF supporting the SNB's use ofvery negative interest rates and FX interventions to support inflation. We watch FX reserves this week to see if the SNB intervened in September to weaken CHF when worries about the EMU banking sector intensified.
CAD: Bearish Supported by BoC. Bearish.
We remain bearish on CAD, with the latest change in the BoC's stance adding support to ourview. In its latest meeting, the BoC stated that inflation risks have tilted somewhat to the downside and growth may be somewhat lower than anticipated in July, softening the hawkish tone that it had been adopting so far despite weak economic data. This increases the possibility of the BoC cutting rates this year, particularly in light of weakening inflation data. 3Q growth expectations have improved somewhat in recent weeks due to better July GDP and a narrower trade deficit but we are still skeptical the BoC's forecasts will be reached. Given the markets are pricing only a few bps of rate cuts for this year, and CAD has the largest long positioning in G10, we think further data weakness could weaken CAD significantly. We like selling CAD against other commodity currencies.
AUD: Further Upside. Bullish.
We think AUD has further room to appreciate if risk remains supported and data continues to improve. This week's retail sales and trade data were better than expected and point to strong 3Q growth and Gov. Lowe's first meeting last week showed no real change to the RBA's outlook or framework. We think they will remain on hold throughout 2016 and record building approvals data is another sign that risks of further rate cuts to financial stability remain high. With AUDUSD at 0.76, it still has room to go higher before the RBA becomes too worried about overvaluation.
NZD: Underperformance vs AUD. Neutral.
We are somewhat bullish NZD but expect it to weaken vs AUD. The RBNZ changed its most recent statement very little despite improving growth data and milk prices and also pointed to slowing house price appreciation. Nonetheless, we believe only an aggressive easing cycle will change the trend in NZD and we won't get more clarity on this until the November MPS. Inflation remains low, but even if the RBNZ does small amounts of easing, it is difficult for the central bank to weaken the currency in a time when markets are looking for anything high yield.
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USD/JPY: Staying Long Into FOMC Minutes; EUR/USD: Watch For A Close Below 1.1130
Columbus Day keeps the US quiet, and the news front is mostly limited to FOMC Minutes on Wednesday (how close did they get to a rate hike?) and retail sales on Friday.
The key this week is whether the bear market in Treasuries resumes amid the lack of news. If we do see yields edge higher without obvious drivers, and particularly if that doesn’t undermine global risk sentiment, USD/JPY gets support. We’re long USD/JPY*.
EUR/USD is still stuck in its range. Apart from longs in EUR/GBP* in case Euro bears get evicted more generally, I don’t see much to do unless we get a close below 1.1130 and excite the chartists.
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EUR/USD: Watch For A Close Below 1.1130
EUR/USD is still stuck in its range. Apart from longs in EUR/GBP* in case Euro bears get evicted more generally, not much to do unless we get a close below 1.1130 and excite the chartists.
AUD, NZD, CAD: Chart: Responses To Oil Prices Have Broken-Down
Crude oil prices have strengthened significantly following the planned agreement at the 28 September OPEC Algiers meeting to limit production to 32.5 million barrels per day from November. Although the details have yet to be fleshed out, the agreement has been seen as significant progress from the Doha meeting debacle in April, particularly given Russia’s positive stance. However, significant barriers still remain to the both the negotiations and the implementation of any November deal, and our Commodity Strategy team remain of the view that WTI will trade in a USD 35-50/bbl range over the next six months.
However, the commodity bloc had a muted reaction to the news headlines and, more broadly over the month, oil price strength has not fuelled commodity bloc strength. AUDUSD rose initially on the OPEC news, but these gains have since been reversed, while the CAD and NZD have weakened over the month. Unlike in 2015 and early 2016, where the bloc closely tracked oil price moves, the response of the commodity bloc to oil price moves appears to have broken down.
Therefore, we expect reactions in G10 FX to OPEC news to be short-lived.
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GBP: Here Is Why A Weaker Sterling Won't Help the UK Economy
The costs and benefits of the circa 15% trade weighted fall in sterling on the UK’s economy is an increasing focus of debate. Some have seen the fall in the pound as a positive for UK growth and a necessary corrective to economic imbalances.
By contrast, while we see the weaker exchange rate as an inevitable consequence of the Brexit shock, the UK economy’s ability to rebalance through the FX channel is limited by the country’s export mix and integration with global supply chains.
On the external front, downside risks to global growth and, in particular, slowing world trade, make the timing of Brexit unfortunate from a rebalancing perspective. In an era of rising protectionism, the UK may find it more difficult to establish the free trade deals it needs after loss of Single Market access.
Moreover, due to the impact of higher prices on domestic demand, the fall in the pound is more likely than not to depress growth next year.
EUR/USD: What's Next After The Downside Break Of 1.0950?
Following the downside break of 1.0950 we believe that EUR/USD has further room to fall near-term.
Technically, we could see a further fall towards the 1.0700-1.0850 area. According to IMM data, the market is short EUR/USD but not in stretched territory. As such, this increases the sensitivity of the cross to relative rates, which are bearish for EUR/USD near-term. With little more than a month to maturity, the delta risk profile will rise for an unchanged spot leaving the position increasingly vulnerable to a move lower in the EUR/USD. The 1.0150 sold put option is far out of the money, yet the vega-profile remains negative.
Fundamentals Fundamentally, we are near-term bearish on EUR/USD forecasting the cross at 1.09 in 1M and 1.08 in 3M.Relative growth and rate expectations are bearish for EUR/USD near-term as we expect the ECB to extend QE in December and the market will continue to focus on that the Fed may raise interest rates in the same month. While we expect that the Fed will refrain from raising rates, the prospects of Fed rate increases will remain a market theme supporting the USD.
Medium-term, we remain EUR/USD bull forecasting EUR/USD at 1.11 in 6M and 1.15 in 12M. Our medium-term valuation (MEVA) model continues to support a significantly higher EUR/USD on a 1-2 year horizon. Meanwhile, Eurozone-US current account (CA) differential is at the highest level since Q4-2004 supporting a higher EUR/USD over time.
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Week Ahead: If In Doubt, Stay Long FX Carry Trades
G10 FX carry trades are in demand once again supported by abating political uncertainty ahead of the US presidential elections, generally resilient global data and expectations of only cautious Fed tightening from here.
In addition, markets have, for now, shrugged off their fears about ECB and BoJ taper, and reloaded on EUR- and JPY-funded carry trades.
Last but not least, the initial ‘hard Brexit’ shock seems to be abating and that is helping GBP stabilise while calming market nerves.
The status quo should persist into next week with the upcoming data (US Q3 GDP, Germany’s ifo) unlikely to trigger sustained tightening of the global financial conditions. While markets seem to be more than halfway through pricing in a December Fed move, we doubt that there is a scope for further aggressive front-loading of rate hike expectations before the outcome of the US presidential vote is known. In addition, QE taper fears could remain contained for now as investors await the ECB’s December meeting.
Demand for G10 FX carry trades could continue to prop up AUD and NZD. Potential upside surprises from the Australian CPI or the NZ trade data next week could be supportive as well. USD will remain in demand but with many positives already in the price, the upside maybe less pronounced than in recent weeks.
EUR and JPY may remain vulnerable for now especially if risk sentiment continues to hold up well.
GBP’s recent consolidation could continue with market nerves calming after the initial ‘hard Brexit’ shock. The further improvement of UK data next week could point at a more balanced BoE outlook ahead of the November Inflation Report and prop up the currency.
Scandi currencies could attract considerable attention ahead of the Norges Bank and Riksbank meeting. No change in the policy outlook is expected from both but the impact on NOK and SEK could differ. In particular, an unchanged Riksbank outlook could highlight that a lot of negatives are in the price of SEK and could help the currency consolidate. In the case of NOK, we sense that some clients are expecting a repeat of the relatively hawkish September meeting, which made NOK the best performing G10 currency last month. A more cautious Norges Bank assessment could be perceived as dovish and stand in the way of further NOK appreciation.
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