Weekly forecast - page 17
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USD, EUR, JPY, GBP, CHF, AUD, NZD: Weekly Outlook - Morgan Stanley USD: Staying Offered. Bearish.
The cyclical rebound in China’s growth has supported global risk appetite, and investors’ hunt for yield has brought global risk premia down. In this environment, low US real yield is unattractive and the USD should continue to come under selling pressure. This week, the FOMC meeting will be in focus. Recent mixed US data indicates that there is unlikely to be a material change in the Fed’s dovish stance, which means the USD will remain offered for now.
EUR: Range Bound Post ECB. Neutral.
We maintain our view for EUR to be range bound following the recent rather uneventful ECB meeting. The ECB’s language on the exchange rate remained relatively benign but we do expect the ECB to push back If EUR appreciates from current levels. Furthermore, while the economy appears to have had a strong 1Q, forward-looking indicators point to a sluggish 2Q while Brexit risks and signs of increasing populism (such as the Dutch referendum result) will also limit the EUR’s upside. We remain long-term bears.
JPY: Tactical Weakness. Neutral.
Watch: CPI, Industrial Production, BoJ Rates Decision We think USDJPY could tactically rebound to 112.50, as strong global risk appetite reduces the demand for safe haven assets and pauses JPY-supportive repatriation flows by domestic investors. However, our medium term bullish view on JPY has not changed and we would look to sell at 112.50. This week, CPI numbers and the BoJ meeting will be in focus as markets assess whether the BoJ still has policy tools left to curb the unwanted currency strength.
GBP: Supported by Risk Premium. Neutral.
Approvals The global risk-on sentiment provides the backdrop for a GBP rebound in the short term. In an environment of declining risk premia globally, GBP’s high risk premium due to Brexit uncertainty is attractive to investors and should keep the currency supported. The “Remain” camp gaining more votes in recent polls may also ease investors’ concerns about Brexit temporarily, but we expect volatility to increase as Brexit campaigns step up.
CHF: EU politics watched. Neutral.
Watch: Sight Deposits, KOF Leading Indicator For now, we expect EURCHF to remain fairly range bound but are waiting for opportunities to sell longer term. In times of global risk-off, the CHF tends to underperform the JPY. However, when it is a European issue, such as the pressure from the rise of populist parties and Brexit worries, the CHF tends to strengthen. The Dutch referendum is another sign that political risks are rising in the Eurozone. We don’t think the SNB would outright reverse CHF appreciation through intervention, but they could limit the magnitude.
AUD: Watching CPI. Neutral.
We remain medium-term bears on AUD and but have closed our short AUDUSD position given our view that the commodity and risk rally can continue. Last week’s employment data was mixed, with a strong headline but weak full-time/part-time split, though it is likely good enough for the RBA to maintain its neutral bias. We still expect the RBA to ease by 50bps this year as commodity prices fall and data deteriorates and view further appreciation of AUD as increasing the risks these cuts happen earlier than expected.
NZD: Focus on RBNZ. Neutral.
Helped by the global risk-on sentiment, CPI figures coming in line with expectations and a solid rise in dairy prices, NZD has broken the 0.7000 level for the first time since June 2015. However, we are cautious about the currency strength as the NZD TWI currently trades at a 4% premium to the RBNZ’s Sep-16 forecast, which is the threshold.
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Setups: EUR/USD, USD/JPY, EUR/CHF, AUD/USD, NZD/USD, USD/CAD The following are the latest technical setups for EUR/USD, USD/JPY, EUR/CHF, AUD/USD, NZD/USD, and USD/CAD as provided by the technical strategy team at Barclays Capital.
EUR/USD: Our bearish view was initially encouraged by the move below 1.1230. We now look for an extension below 1.1210 to open our next targets near the 1.1145 range lows and then the 1.1065 area. Beyond there, we are targeting a move towards the 1.0820 area.
USD/JPY: We have turned neutral following the unexpected break above the 110.65 former range lows. The risk is a squeeze higher in range towards 113.30. Overall the trend is bearish and we are looking for reasons to re-establish a bearish view towards the 1.0760 lows.
EUR/CHF: We are overall bullish and look to buy dips while the 1.0840 lows underpin. A move above our initial targets near the 1.1025 March range highs would point higher towards 1.1060 and then the 1.1115 area.
AUD/USD: Last weeks ‘‘doji’’ candle signals a breather from the recent up-move. We look for a dip within range towards the 0.7590 area. We would then look for signs of a base near the 0.7475 range lows.
NZD/USD: Failure to sustain a breach of resistance near 0.6990 along with last week’s topping candle helps to keep us bearish. We are looking for a move lower towards targets near 0.6760 and then the 0.6670 area. A bullish weekly reversal in AUDNZD points towards our targets near 1.1335/1.1360.
USD/CAD: The move below our targets in the 1.2670 area endorses our greater bearish view. We expect upticks to find selling interest near the 1.2780 area and look for further downside towards 1.2050/1.1915.
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Tech Targets: EUR/USD, GBP/USD, AUD/USD, NZD/USD
EUR/USD: Neutral: Likely in 1.1200/1.1400 range.
We just turned neutral on EUR yesterday and there is no change to the view. We continue to expect this pair to trade between 1.1200 and 1.1400 for now.
Looking further ahead, the odds for a break above 1.1400 appear to be higher than a break below 1.1200.
GBP/USD: Bullish: Take partial profit at 1.4670.
As mentioned in the 24-hour view update, the recent upward pressure has eased and the current movement is likely a short-term consolidation phase (before further up-move can be expected). Stop-loss remains unchanged at 1.4420 even though 1.4470 is already a strong support.
Target is at 1.4670 and those who are long should consider taking partial profit at this level.
AUD/USD: Shift from neutral to bearish: Pull-back to extend lower to 0.7475/0.7520.
On a daily closing basis, AUD ended lower by 164 pips yesterday, the largest single day drop since June 2013. Such big moves are clearly not common and could presage further decline in AUD in the days ahead. From a technical perspective, the rally that started from the January’s low of 0.6825/30 appears to have topped out at 0.7835. The current weakness is viewed as a corrective pull-back that has scope to extend lower to test the major support zone near 0.7475/0.7520 (just above the 38.2% retracement of the 0.6825 - 0.7835 rally which is at 0.7450).
The key resistance is obviously at yesterday’s peak of 0.7765 but in order to maintain the current momentum, any rebound should not move above 0.7690. In other words, the outlook for AUD in the next 1 to 3 weeks is deemed as bearish. Immediate objective is for a move to the 0.7475/0.7520 support zone.
NZD/USD: Neutral: In a 0.6800/0.7000 range.
The strong rebound from the low 0.6808 just before RBNZ’s announcement earlier suggests that the short-term downward pressure has eased (pull-back did not reach our objective of 0.6765).
From here, the outlook is still neutral but we expect this pair to trade within a broad 0.6800/0.7000 range.
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Week Ahead: 'Yellen Put' In Play, USD-Bashing Into NFP, Sell AUD Vs CAD, NZD The latest BoJ and ECB meetings have confirmed that they have, at least for now, hit a limit for their easing policies. After the rather mixed message from the April FOMC meeting, it also seems as though the ‘Yellen put’ is the one safety net that investors can fall back on if global shocks were to derail the nascent economic recovery. On the face of it, none of this should matter so long as the latest risk rally is based on improving global economic fundamentals, growing company earnings and recovering commodity prices.
That said, a look at the G10 economic surprise indicators would suggest that with some notable exceptions the data releases, especially in the major economies, are still coming in below market expectations. At the same time, the recent US stock market rally has pushed valuation metrics to multi-year highs, suggesting that the Fed dovishness rather than earnings were the driver. The commodity price rally is supported by the approaching US driving season, indications of solid demand from EM and abating oversupply concerns on the back of the drop in US oil production. That said, there is no denying that weak USD on the back of a dovish Fed is also a factor behind the rally.
The question about the importance of the ‘Yellen put’ as a driver of the risk rally will become more relevant next week when US data could highlight the temporary nature of the latest economic slowdown and the continuing tightening of US labour market conditions. Given how entrenched the latest USD-bearishness has become, however, we think that it would take positive data surprises to bring the latest USD-bashing to an end.
Elsewhere, AUD could continue to struggle ahead of the RBA although we would prefer to express any bearish views against other commodity currencies like NZD or CAD. The latter could remain resilient if the upcoming labour data adds to the stream of positive surprises from NZ and Canada. We maintain a constructive view on SEK but recognise that investors could turn more cautious after the latest disappointing data. JPY could remain resilient given that the BoJ’s inaction fuelled concerns about its officials’ ability to boost growth and inflation.
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Week Ahead: 'Yellen Put' In Play, USD-Bashing Into NFP, Sell AUD Vs CAD, NZD
The latest BoJ and ECB meetings have confirmed that they have, at least for now, hit a limit for their easing policies. After the rather mixed message from the April FOMC meeting, it also seems as though the ‘Yellen put’ is the one safety net that investors can fall back on if global shocks were to derail the nascent economic recovery. On the face of it, none of this should matter so long as the latest risk rally is based on improving global economic fundamentals, growing company earnings and recovering commodity prices.
That said, a look at the G10 economic surprise indicators would suggest that with some notable exceptions the data releases, especially in the major economies, are still coming in below market expectations. At the same time, the recent US stock market rally has pushed valuation metrics to multi-year highs, suggesting that the Fed dovishness rather than earnings were the driver. The commodity price rally is supported by the approaching US driving season, indications of solid demand from EM and abating oversupply concerns on the back of the drop in US oil production. That said, there is no denying that weak USD on the back of a dovish Fed is also a factor behind the rally.
The question about the importance of the ‘Yellen put’ as a driver of the risk rally will become more relevant next week when US data could highlight the temporary nature of the latest economic slowdown and the continuing tightening of US labour market conditions. Given how entrenched the latest USD-bearishness has become, however, we think that it would take positive data surprises to bring the latest USD-bashing to an end.
Elsewhere, AUD could continue to struggle ahead of the RBA although we would prefer to express any bearish views against other commodity currencies like NZD or CAD. The latter could remain resilient if the upcoming labour data adds to the stream of positive surprises from NZ and Canada. We maintain a constructive view on SEK but recognise that investors could turn more cautious after the latest disappointing data. JPY could remain resilient given that the BoJ’s inaction fuelled concerns about its officials’ ability to boost growth and inflation.
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Dollar Rally Ends With A Bang...Look Out Below
The US dollar reversed higher on May 3 and trended higher. It peaked on May 30, but it was not clear until Friday's poor US jobs report sent the greenback reeling on June 3. The fact that May 3-May 30 move is over is the most important technical consideration for the dollar's outlook.
It is interesting to recall that the dollar had bottomed a fortnight before the FOMC minutes and Fed comments had encouraged the market to re-price a summer hike. The dollar now has peaked prior to investors pushing out the rate hike once again.
The prudent first assumption is that the dollar is correcting its May advance. This simple approach can be used for all the major currencies, but the Japanese yen, which took out the retracement objectives. While the JPY106.25 area may offer the dollar some initial support, there is little stopping a return to the May 3 low of JPY105.55. A break of it would fan expectations of a move toward JPY100 (with JPY100.60 representing a 50% retracement of the Abe-Kuroda rally).
Given that many fund managers are barred from taking naked currency positions, a bullish yen view can be expressed by buying Japanese government bonds. Foreigners have been net buyers of JGBs for nine consecutive weeks, after selling in March. At the same time, others may conclude that the yen's strength (even if the dollar actually weakness) may increase the likelihood of additional easing by the BOJ. This may attract some foreign buyers to JGBs on ideas that yields still have room to fall.
The euro's rally after the dismal US employment report was the third largest advance of the year. It shot through the 38.2% retracement, near $1.13, to approach the 50% retracement at $1.1360. Above there is the 61.8% retracement objective ($1.1420) which is also near the upper Bollinger® Band ($1.1440). The five-day moving average is likely to cross above the 20-day early next week, and this is a helpful proxy for trend followers. Technically, the euro should hold above $1.1250.
Sterling was the only major currency to lose ground against the US dollar in the past week (~-0.6%). The culprit was not the economic data. In fact, the UK's composite PMI for May was better than expected at 53.0, which is also above the three-month average. Fears of Brexit appear to have been rekindled based on some surveys, and sterling experienced its biggest weekly drop against the euro in a year.
The euro had trended lower against sterling from early-April through late-May. Over that period, the euro went from about GBP0.8115 to around GBP0.7565. That move effective retraced 50% of the euro's advance from last November and is over. The next target for the euro is GBP0.7840 and then GBP0.7900. Against the dollar, the $1.4600 offer initial resistance with stronger cap a little above $1.4700.
Recently, the Australian dollar has been leading the other majors. The Aussie peaked on April 21 (~$0.7835), while the other majors did not peak until May 3. The Aussie bottomed on May 24 (~$0.7145). The other majors did not bottom until May 30. An upside correction should be expected in the period ahead. The first target is a little above $0.7400 and then $0.7500. We do not expect the RBA to cut rates this coming week, but if it does, the Australian dollar needs to hold around $0.7270 to keep the constructive outlook intact.
The US dollar has shed 38.2% of its gains against the Canadian dollar that have been registered since May 3's key reversal. The CAD1.2910 level was first seen on May 26, but the greenback recovered over the next several sessions to hit a high near CAD1.3145 on June 2. The technical indicators suggest a high probability that the CAD1.2910 will yield, which would allow for a move toward CAD1.2825, and possibly CAD1.2740.
Since late-February, the US 10-Year note yield has held above the 1.70% level. The chief exception was April 7 when the yield slipped to 1.68%. The labor market disappointment saw yields return to their lows. Assuming that the jobs data may have exaggerated the weakness that the regional surveys have picked up in May, soft economic data should be seen in general for the rest of the month. This could see the 10-year ease toward 1.63%-1.65%. A move through there and the only thing to see is the 1.53% low on February 11.
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AUD/NZD: A Good Buy; EUR/USD: Hedge Into UK EU Referendum
The big overnight movers are the pound (regaining some of yesterday’s politically-inspired fall) and the Australian dollar, which has reacted positively to the RBA leaving rates on hold. The RBA cut rates in April and after stronger then expected growth data, isn’t in a big hurry to act again. The Statement was balanced however and the lack of inflation and the global and trade environment could see a further cut in due course. We’re not bailing out of our AUD shorts, though at these levels, AUD/NZD is a good buy.
We’ll get Chinese FX reserves data overnight and the RBNZ tomorrow evening. This morning also saw Swiss FX reserves, up to a new high at CHF 602.1bn, indicative of how hard they have to work to compensate for a lack of capital outflows.
None of this is a recipe for buying vol, though maybe, given the way markets are now priced, using buying EUR/USD puts as protection ahead of the UK EU referendum now makes sense.
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5 Things to Watch on the Economic Calendar This Week
1. British EU referendum
The U.K. will vote on a referendum to decide if it continues to be a part of the European Union on Thursday, with polls closing at 21:00GMT. The result will likely be projected early Friday, before the official vote count is announced, based on preliminary vote counts and exit polling.
The June 23 vote could have big implications for the global economy. Analysts say if the vote is to leave, the pound could drop sharply, stocks and commodities would sell off, while safe-havens, like gold and bonds, will see increased demand. A vote to stay may have the opposite effect, causing a snap back in the pound and risk assets and a sell-off in bonds.
Voters in the U.K. appear to be evenly split on whether to support a departure by the U.K. from the European Union. While the "Remain" campaign held as much as a 70-30 lead several months ago, the "Leave," vote has surged ahead in several prominent polls last week.
2. Fed Chair Yellen testifies
Federal Reserve Chair Janet Yellen is set to deliver her semi-annual monetary policy testimony on the economy before Senate and House committees in Washington DC on Tuesday and Wednesday.
Yellen is scheduled to testify on the economy before the Senate Banking Committee at 14:00GMT, or 10:00AM ET, Tuesday. On Wednesday, Yellen will appear in front the House Financial Services Committee also at 14:00GMT, or 10:00AM ET.
Little news is expected from the Fed chair, after the U.S. central bank released updated forecasts on the economy and interest rates following last week’s policy meeting.
3. U.S. housing, durable goods data
The National Association of Realtors is to release data on existing home sales for May at 14:00GMT, or 10:00AM ET, on Wednesday, amid forecasts for a gain of 1.1% to 5.54 million, following an increase of 1.7% a month earlier.
On Wednesday, the Commerce Department is to publish a report on new home sales for May at 10:00AM ET. The data is expected to show a drop of 8.0% to 565,000, following a jump of 16.6% in April.
The U.S. is to close out the week with a report on May durable goods orders at 12:30GMT, or 8:30AM ET, Friday. The data is expected to show that orders for durable goods slumped 0.5% last month, following a gain of 3.4% in April, while core orders are forecast to inch up 0.2% after rising 0.5% a month earlier.
4. Flash euro zone PMIs for June
The euro zone is to publish preliminary data on manufacturing and service sector activity for June at 08:00GMT, or 4:00AM ET, on Thursday, amid expectations for a modest decline.
Ahead of the euro zone PMI's, France and Germany will release their own PMI reports at 07:00GMT and 07:30GMT respectively.
5. German business surveys
A pair of reports on June German business sentiment will also be in focus. The ZEW Institute will publish its German business climate index at 09:00GMT on Tuesday, while the Ifo research institute will release its own report at 08:00GMT on Friday.
Tech Targets: EUR/USD, GBP/USD, AUD/USD, NZD/USD, USD/JPY
EUR/USD: Neutral: Shift to bullish if daily closing above 1.1365.
While the break above 1.1330 earlier bodes well for EUR, confirmation of a bullish phase is only upon a daily closing above 1.1365 (falling trend-line resistance). The odds for such move appear to be quite high unless there is a move back below 1.1250 from here.
GBP/USD: Shift from bearish to neutral: Rebound could extend further to 1.4665.
The bearish phase that started early last week ended abruptly as GBP rocketed higher last Friday. While the current rebound could extend further to 1.4665, only a daily closing above this level would increase the odds for a break above last month 1.4770 high. In the meanwhile, we prefer to hold a neutral view even though the bias is clearly on the upside as long as the support at 1.4365 is intact. Looking further into Brexit end of this week, volatility is expected to remain elevated and it may be more prudent to focus on the shorter-term move (see 24-hour view on the left panel).
AUD/USD: Neutral: In a 0.7260/0.7460 range.
While the neutral phase that started early last week is still intact, upward momentum is improving rapidly and a clear break above the expected 0.7260/0.7460 sideway range would indicate the start of a sustained up-move in AUD (immediate target is a for a move above 0.7505 towards 0.7545). The support at 0.7310 is likely strong enough to hold any pull-back, at least for the next few days.
NZD/USD: Neutral: Bullish only if above 0.7145/50.
While shorter-term upward momentum has improved considerably, NZD has to break clearly above the recent 0.7145/50 high before further sustained up-move can be expected. In the meanwhile, this pair is expected to stay underpinned with strong support at 0.6990.
USD/JPY: Bearish: Diminished odds for further USD weakness.
While the stop-loss for the current bearish USD phase is still intact at 105.70, the sharp rebound from the low of 103.58 has diminished the odds for further USD weakness. That said, unless 105.70 is taken out, a more definitive test of the 103.50 support cannot be ruled out just yet. In view of the recent rapid and sharp drop, those who are shorts may like to take at least some partial profit at this level.
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Brexit Wins: New Targets For GBP/USD, EUR/GBP
While the Brexit vote was a shock (we attached a 40/45% probability), we are not surprised by the initial currency market reaction. Cable still remains within our forecasted one-month range between 1.3000 and 1.5000.
In our previous base case scenario assuming that the UK voted to remain within the EU we were expecting cable to stabilise in the year ahead at around the 1.5000-level. However, the initial sharp pound weakness following the Brexit vote is fundamentally justified and is not overshooting in the near-term. The heightened political uncertainty in the UK including today’s resignation from Prime Minister Cameron with a new Conservative leader to be elected in early October, will continue to weigh heavily on the pound. The increased risk of recession in the UK and looser BoE policy in the year ahead justify a weaker pound. Capital inflows into the UK will also be dampened making it more challenging to the finance the UK’s elevated current account deficit requiring a weaker pound.
In these circumstances, we expect cable to fall into the mid-1.2000’s in the second half of this year before rebounding modestly back above the 1.3000- level in 2017 as heightened uncertainty gradually eases. The pound is already significantly weak according to our long-term valuation models which should help to dampen further downside unless there is a run on the pound.
We expect further more modest upside for EUR/GBP as well rising towards the mid to high 0.8000’s in the second half of this year before falling back towards the 0.8000-level in 2017. It is consistent with our alternative Brexit scenario outlined prior to the release of the referendum results.
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