Weekly forecast - page 7
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EUR: 4 Cross-Currents In Play: What Is The Trade? - Morgan Stanley In its weekly note to clients, Morgan Stanley argues that the cross-currents of negative flow dynamics and upward pressure from risk appetite may keep EUR without a clear trend in the near term.
Here are MS' explanation for some of these cross-currents along with their structural strategy to trade the EUR over the course of their year.
4 cross-currents in play:
"First, EUR inflation rates have continued undershooting expectations. Indeed, inflation momentum itself has fallen fast in recent months, leading some to question whether the ECB’s recent stimulus efforts will be enough. Of the G4, Europe faces the slowest core inflation momentum as pointed out by our inflation strategists Global Inflation Monitor. 5 year inflation swaps have declined by almost 20bps taking inflation expectations back to levels last traded in October. Nominal rate expectations have come down in line with falling inflation rates increasing opportunity costs of holding EUR liquidity.
Second, while the ECB disappointed markets by failing to increase monthly asset purchases, it did cut interest rates even further into negative territory. We think reserve managers are particularly sensitive to negative rates as they violate the principle of capital preservation. The IMF’s latest COFER data show that reserve managers continue to bring the EUR share of their portfolios down. The start of the new year and fresh liquidity has given reserve managers a window to resume their structural diversification out of EUR.
Third, the RMB has declined not only against the USD, but as well in TWI terms. This has increased global deflationary pressures where trade to China is significant and where there are open economies impacted by the evolution of global trade. EMU falls in these categories, so when the RMB moves the EUR tends to follow.
Finally, the EUR is now better suited for funding. On the funding side we differentiate between maturity neutral funding and what is widely understood as the carry trade. Carry trade funding involves investors monetising interest rate differentials but accepting maturity mismatches between generally shorter funding and longer investment time horizons. Hence carry trades are less stable than maturity-neutral funding situations," MS clarifies.
What is the trade?
MS likes short EURJPY as a structural trade over the course of the year.
"In the the end, we would not go so far as to say that the EUR’s lower beta to risk is permanent; it has only been a few days of activity. But there are certainly structural weights on the EUR that are not apparent in JPY. For this reason our forecasts still imply another 10% of downside in EURJPY this year," MS projects.
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EUR/USD Outlook: Euro Expected to Remain Below $1.10 in Calm Week The upcoming week should be a little more calm, as there are almost no major events on the agenda.
In terms of the macroeconomic calendar, not much is planned for next week. Euro zone industrial production for November is due on Wednesday, followed by the European Central Bank accounts from the last meeting in December.
"December’s ECB Governing Council meeting minutes are published, and here we expect them to shed light on last month’s disappointing (to markets, at least) monetary policy decision. Look closely for signs of the degree of consensus among GC members, and the willingness (or lack thereof) of some to consider looser policy in 2016 under the right circumstances," James Rossiter, vice president & senior global strategist at TD Securities, wrote on Friday.
From the US dollar point of view, the Labor Market Conditions Index is due on Monday, along with JOLTS job openings on Tuesday. On Wednesday, the Federal Reserve's beige book will be published, followed by the monthly budget statement.
The week will close with retail sales for December, along with the Empire State Manufacturing Index and PPI indices.
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USD, EUR, JPY, CAD, AUD, NZD: Weekly Outlook - Morgan Stanley
USD: Best House in a Bad Neighbourhood. Bullish.
Unlike in prior tightening cycles, we expect USD to continue appreciating following liftoff a few weeks ago. While the US economy does not look particularly strong, the most important elements of the economy (employment, services, housing) are humming along just fine. The US will remain the ‘best house in a bad neighbourhood’ and will attract capital flows from abroad.
EUR: A Break in the Risk Link? Neutral.
EUR has continued to weaken even as risk sentiment deteriorated in recent days. We think this is related to disappointing inflation prints, which increase the likelihood that the ECB will be forced to do more. Also, IMF COFER data suggest reserve managers continue to diversify out of EUR. This process may have accelerated after the ECB drove rates further into negative territory. EUR should continue to weaken versus JPY over the course of the year.
JPY: 2016 All Star. Bullish.
Our bullish JPY view appears to be playing out even faster than we expected. Weak risk appetite has supported repatriation to the safe haven JPY. But more than that, we think there is an underlying policy shift in Japan away from monetary and toward fiscal policy. The BoJ is unlikely to ease further, with greater focus being placed on fiscal stimulus and encouraging corporates to pay higher wages and invest onshore. We think the market underappreciates potential for pension liquidation by the retiring Japanese population, which will force some repatriation of foreign assets and make flows more two-way than in recent years.
CAD: Will the BoC React? Bearish.
Ongoing softness in oil prices continues to weigh on CAD, although it is not the whole story. Other data weakened in 4Q, including manufacturing and non-commodity trade. We expect the central bank will shift toward a more dovish stance following its meeting on the 20th with a risk of cutting rates. The market continues to price in too little probability of easing in 1H16.
AUD: It’s Not Over. Bearish.
Concerns about China’s growth, weak commodity prices and a general deterioration of risk sentiment have led to a sharp fall in AUD in these early days of 2016. While the speed of the decline may slow, we still expect further AUD weakness as external developments have knock-on effects on the domestic economy. Macroprudential tightening is set to weigh on the housing market, which has been one bright spot of Australia’s economy. As such, we expect 50bp of easing from the RBA in the first half, which is far from priced.
NZD: Breaking Lower. Bearish.
NZDUSD has broken out of the bottom end of the trend channel, supporting further downside. Being a high-beta, less liquid currency, NZD is particularly vulnerable in times of risk-off. In addition, the dairy auctions are showing signs of weakness once again. With the EU bringing more milk supply to market and a slowing Chinese economy, NZD is vulnerable. Lower inflation expectations could bring further RBNZ rate cuts back on the table too.
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EUR/USD: Rebound Has Room To Extend: Levels & Targets - UOB We view the current movement as part of a corrective rebound which has scope to extend higher to test the strong 1.0990/95 resistance.
A clear break above this level would indicate further EUR strength towards the December’s high of 1.1060.
Strong support is at 1.0895 ahead of 1.0800.
Quiet Week And Risk Off: What Is The Trade? - Credit Agricole The thin data calendar this week could mean that swings in the market risk sentiment will continue to dominate the G10 FX markets. Indeed, risk aversion could linger in the absence of policy measures to bolster investors' confidence and we remain cautious in our outlook for risk-correlated and commodity currencies.
In addition, in the case of antipodeans, potential disappointments from the Chinese trade balance figures and monetary aggregates as well as the Australian labour market data, could keep the selling pressure on AUD and NZD in place for now.
While the latest bout of risk aversion burnished JPY safe haven appeal, we continue to expect limited gains from here given the BoJ's readiness to act in response to further escalation of the market risk aversion and/or unwarranted FX appreciation.
Even if the market risk aversion remains the dominant theme thix week, some of the data releases and the events could attract considerable attention. In particular, the US retail sales and the Fed speakers should be of interest.
We think that the uncertainty going into the retail sales is considerable, so that markets looking for a subdued print during the holiday season maybe in for a positive surprise. In addition, we suspect that the Fed speakers during the week will try to bolster market risk sentiment by reiterating their confidence in the US recovery in the face of lingering global growth threats. This could come across as hawkish and support USD.
GBP was among the majors that have underperformed greatly at the start of the new year. We believe that the upcoming IP and MP data releases as well as the January BoE meeting could help prop up GBP. Indeed, the latest currency underperformance was related to growing concerns about the impact of a potential Brexit. We think that the latest selloff seems somewhat premature given that there is still no date for the EU referendum and that the supporters of Brexit are by no means in majority. We think that evidence that the BoE view on the economy has changed little of late could trigger a round of profit taking by those betting on more MPC dovishness given the latest data and growing Brexit fears.
Last but not least, investors will focus on the release of the ECB minutes. The ECB speakers we had since the December meeting, which left many disappointed justified the lack of more decisive easing measures. We think that the minutes will highlight that the decision was controversial with the ECB dovish lean centred around the President still very much there. With the Eurozone inflation expectation starting to correct lower in response to the disappointing December flash HICP estimate and the persisting selloff in the global commodity prices, markets could start betting on more easing to come and sell EUR.
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EUR/USD, USD/JPY: A 'Work In Progress': Levels & Targets - Citi CitiFX Techs sees 'early signs' of some stabilization in major equity markets.
"The price action on the S&P 500 is similar to that seen at the September lows suggesting a bounce in the near term. The VIX Index is also turning back down after testing resistance levels which is another sign that the S&P 500 is likely to move higher.
Should equities stabilize and even bounce, Citi thinks that the the major funding currencies – JPY and EUR – are likely to move lower over the coming sessions and possibly into the end of the week.
Starting with USD/JPY, Citi notes that its daily chart is a 'work in progress'.
"At this stage USDJPY is still in “no man’s land” but is beginning to test resistance levels at 118.06-118.69. A close above there, if seen, would be constructive and begin to suggest that the correction down may be over.
Support levels are at 115.58-116.15," Citi argues.
For EUR/USD, Citi notes that the bounce we have seen has been fairly short lived and now we see signs that equity markets could stabilize or even rally.
"That in turn should reduce the concerns about a EUR bounce and may well be something that brings the underlying downtrend back into play.
The levels between 1.0797 and 1.0819 are still important and a close back below there would bring the bearish trend in focus again.
As is the case with USDJPY, this is a “work in progress”," Citi adds
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EUR/USD Into Next Week's ECB: Range & Outlook - BTMU The euro has continued to remain relatively stable against the US dollar so far this year, notes Bank of Tokyo Mitsubishi (BTMU).
"The euro is deriving support from more risk-averse trading conditions which is encouraging a reduction of short positions. However, we would have expected the euro to have strengthened more notably by now given the recent more “favourable” financial market conditions.
EUR/USD jumped from around the 1.1000-level to a peak of around the 1.1700-level in August of last year when risk assets similarly corrected sharply lower. An extension of the ongoing sell off in risk assets in the week ahead would increase the likelihood that the euro will pop higher. It is a view that is reflected in the options market where the demand for EUR/USD calls is increasing. If the euro’s performance continues to prove disappointing in current market conditions it will provide a more bearish signal for future performance.
The ECB’s upcoming policy meeting could be helping to dampen euro upside in the nearterm. The recent weakening of commodity prices and heightened concerns over growth in emerging economies are likely to prompt dovish rhetoric from President Draghi although it is unlikely he will provide a signal that further easing is imminent," BTMU argues.
BTMU holds a neutral bias on EUR/USD around current levels seeing the pair trading at a 1.0750-1.1150 range in the near-term.
Spillovers & The Risk-Bearish FX Trade - Morgan Stanley In its weekly FX note to clients, Morgan Stanley provide some insights on how investors should play FX amid the current risk-off environment.
1- An Accumulation of Risk: "RMB volatility, falling commodity prices, manufacturing globally slipping into recession and the increasing risk of US economic data rolling over has provided a bearish backdrop for risky assets. Our ‘Dollar and Debt’ framework developed in our 2016 Outlook now pays full dividends with AxJ currencies now markedly weaker. Trading long current-account-surplus currencies such as the JPY, EUR and SEK remains an important part of our investment strategy," MS advises.
2- Spillovers and the USD: "We remain USD bulls even if US data weaken over the next few months. It would not be the first time that US labour market data were boosted by non-seasonal weather conditions, giving up these gains over the following months. A global economy suffering from demand deficiency and parts of EM facing the risk of a volatile de-leveraging already present a large drag for asset markets...
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EUR: ECB Under Mounting Pressure - Barclays We expect the ECB to ease policy further in 2016 as deflationary pressures worsen. However, we think new measures are unlikely to be deployed before June, unless we see another bout of (REER) euro appreciation or a further significant drop in inflation expectations.
Monetary and Financial conditions have deteriorated again after the ECB failed to convince the market that measures announced at the December meeting would be sufficient to bring inflation back closer to its target. The deterioration is worsening at the start of 2016 as a result of stock markets jitters and the further depreciation of the CNY.
We now expect inflation to return to negative territory between February and July 2016, picking up thereafter as a result of base effects, but averaging only 0.1% for the year as a whole (vs. 1% in the ECB’s December projections). This will put pressure on the ECB to announce another round of monetary easing measures.
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Week Ahead: ECB, BoC, China, Risk Off, USD Decouple, Brexiting GBP Official measures to manage FX volatility in China as well as better than expected data of late have failed to boost market risk sentiment.
More decisive policy action is needed to put an end to the market morass. For a growing number of investors, however, the real issue is that the global central banks have reached the limits of their ability to stimulate growth, boost inflation and support risk sentiment.
Further tightening of global financial conditions seems therefore inevitable, leaving risk-correlated and commodity currencies vulnerable while supporting safe haven currencies like JPY and EUR.
The GBP decoupling trade has imploded under the weight of Brexit fears and concerns about the USD decoupling trade are starting to mount.
We remain cautious on risk-correlated currencies and think that CAD could be particularly vulnerable ahead of the BoC meeting next week.
The market theory about the crumbling central banks’ put will be put to the test by the ECB. Falling inflation expectations and depressed commodity prices should make for a dovish outcome with Draghi likely to reiterate that the ECB can further ease aggressively if required. We are bearish on EUR but are mindful of risk from further risk aversion.
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