The breakdown from currency analysts at Morgan Stanley:
USD: Not a US Story. Bullish.
Dollar strength continues to be driven more by what is happening outside the US rather than what's happening in it. Ongoing stresses and uncertainties in emerging markets are weakening most currencies against USD. ECB President Draghi's dovish statement is turning USD strength more broad-based. In the end, global capital should flow to the US which offers the best risk-adjusted return. While domestic growth is soft, we are not expecting a US recession. That said we will keep a close eye on the FOMC and housing data this week for clues on the near-term USD outlook. A meaningful dovish shift from the Fed would lead to a tactical downward correction in USD, but not change the overall upward trend.
EUR: Draghi Fights Back. Neutral.
ECB President Draghi's dovish response to global financial market volatility should put downward pressure on the EUR, as expectations build for a response at the March meeting. That said, there are still EUR-supportive deleveraging flows as global asset markets stay volatile. European political risks further complicate the picture. With all of these crosscurrents, we think EUR will generally be range-bound with perhaps a soft downward bias. Over the course of the year, EUR should continue to weaken versus JPY on negative rates, valuation and domestic policy shifts.
JPY: Still in Favour. 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. More than that, we think there is an underlying policy shift in Japan away from monetary and toward fiscal policy. We do not see imminent BoJ easing, with greater focus being placed on fiscal stimulus and encouraging corporates to pay higher wages and invest onshore.
For latest trades & forecasts from major banks, sign-up to eFXplus
GBP: Declines to Continue. Bearish.
GBP is one of the most sensitive currencies to volatility in the G10. GBP strength over recent years has been related to portfolio and FDI flows which we expect to slow down in this period of uncertainty. The BoE's Carney has made it clear that he is in no rush to raise rates right now, keeping GBP under selling pressure. We like to trade long EURGBP and short GBPJPY. GBP will receive additional headwinds if the Feb European Council meeting results in a date for the EU referendum.
CAD: BoC Behind the Curve. Bearish.
The BoC's decision not to cut rates has taken some steam out of the long USDCAD trade, and we have removed it from our portfolio. That said, we think the medium term outlook is 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. Moreover, the Business Outlook Survey showed the weakest hiring and investment intentions since the crisis. We expect the central bank will shift toward a more dovish stance later this year.
AUD: RBA Shift Coming. Bearish.
Credit Concerns about China's growth, weak commodity prices and a general deterioration of risk sentiment have led to a sharp fall in AUD. While the decline's speed may slow, we still expect further AUD weakness as external developments have knock-on effects on the domestic economy. Macroprudential tightening already weighs on the housing market, which has been one bright spot of Australia's economy. As such, we expect 50bp of easing from the RBA this year, which is far from priced.
NZD: RBNZ Watching. Bearish.
We remain bearish on the NZD for domestic and global reasons. The domestic growth picture is slowing down again with dairy prices failing to pick up and weak CPI supporting the market expectations for further RBNZ rate cuts soon. Thinking globally, the NZD is a high-beta, less liquid currency so is particularly vulnerable in times of risk-off. We like to trade short NZDUSD and will be watching the RBNZ's commentary very closely this week.
Morgan Stanley Chart Of The Week: FX Drivers The following is the weekly update from Morgan Stanley G10 FX drivers tools which spot recent relationships between currencies and different asset classes.
Oil Still Matters More for CAD than NOK.
The USDCAD correlation with oil is still stronger than for USDNOK. On a shorter 2m rolling period, the correlation has become stronger for both, but NOK still remains weaker.
EURUSD Looking at Short End Rates
The 2y spread has become less important for EURUSD. It is still about the equity markets, with the beta to the S&P staying very negative. Commodity prices have a positive beta, which is not as large as for equities
Short Term GBP Sensitivity to Oil Increasing
GBPUSD’s correlation with oil has been increasing since the start of the year. Previously the correlation has tracked that of EURUSD but now the two have diverged.