Market views for 2017 - page 2
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EUR/USD, USD/JPY: Setups & Targets On L/T Charts
EUR/USD is probing the multi-decade channel support and is now tantalisingly close to the lower bound of the broad consolidation zone at 1.0540/1.0465. The pair has been witnessing a slow drift recently and if the aforementioned support levels give way, EUR/USD will face a further downtrend towards the descending channel limit and projections at 1.0180/1.00.
Ongoing consolidation within wide limits of 1.0540/1.0465 and 1.1360/1.15 resembles the one seen back in 2000/2002 when the pair experienced similar choppy up/down-swings.
So long as 1.0540/1.0465 holds, EUR/USD is likely to undergo a slow recovery towards the median of the range at 1.0860 initially. Once this is surpassed it could challenge the upper bound of the zone.
As was the case in 2000-2002, USD/JPY has indeed experienced a dramatic recovery after testing key graphical levels at 100. The formation of a Bullish Engulfing and Double Bottom project objectives near 116 with the potential to test 119.50.
Despite the accelerated rebound, we view this as corrective as the pair is close to achieving important retracements for a previous downmove in price as well as time terms and a temporary high is likely in 1Q17.
In the event of persistent bullish momentum, the next key hurdle will be at the multi decade descending trend near 123/125.
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Top 10 Exchange Rate Trades For 2017: Morgan Stanley Latest Currency Forecasts
Morgan Stanley released their top FX trades for 2017, going short (forecast to fall) on the EUR/GBP, SGD/INR and AUD/CAD. They are going long (forecast to rise) on the USD/JPY, RUB/ZAR and several others.
Morgan Stanley has released their top 10 foreign exchange trades for 2017.
Covering the US dollar, euro, British pound, japanese yen, Korean won, Russian ruble, Indian rupee, Chinese Yuan, South African rand, Swiss franc and the Norwegian Krone. The ten long-term (2017) forecasts are listed below.
1. Long USD/JPY
Long USDJPY is one of Morgan Stanley’s favorite trades next year.
The yield curve in the US is likely to steepen on expectations of a fiscal stimulus.
On the other hand, Bank of Japan’s yield curve management will push rate differentials against the JPY.
Long unwinding is likely to give a further push to the USD/JPY.
The last 3 months can be seen in the dollar-yen exchange rate chart below:
2. Long USD/KRW
Korea is struggling with anemic growth, debt overhang and manufacturing overcapacity.
The fall in the RUB and the JPY are adding to the deflationary pressures on the Korean Won.
Economists at MS expect the Bank of Korea to cut interest rates three times in 2017.
Hence, diverging growth and monetary policy will increase outflows from Korea.
The last 3 months can be seen in the dollar-won exchange rate chart below:
3. Short EUR/GBP
The GBP might outperform in the near-term forecast with expectations that the UK might be able to negotiate itself access to the single EU market.
The high risk political events affecting the eurozone will also undermine the euro. The Italian referendum is the nearest-term risk, due to take place on 4th December.
The excessively short GBP market will also support the currency, however, the currency will again face headwinds in 2017, hence we suggest a buy against the Euro.
The last 90 day euro to pound sterling exchange rate chart is below for reference:
4. Long USD/NOK
Though oil prices have strengthened in the near-term, the correlation between the USD/NOK and oil prices has reduced.
Uncertainty over 2017 budget and Norway government’s slower fiscal support is likely to weigh on NOK, as a failure to strike a deal will start a complicated process of talks, weakening the NOK in the meanwhile.
The exchange rate history for the US dollar vs the Norwegian Krone is included below:
5. Short AUD/CAD
This is a “relative value play” considering the “monetary policy divergences” between Australia and Canada. Bank of Canada is expected to keep rates unchanged, whereas RBA is expected to cut rates in 2017.
“The market currently prices in a small probability of a rate hike, which we expect to be priced out, weakening the AUD,” the analysts wrote.
6. Short SGD/INR
Singapore is a high export exposure economy, which is likely to face headwinds from a slower trade, declining RMB and JPY, trade protectionism and the economic uncertainty in China.
On the other hand, India’s demonetization drive to fight corruption and blackmoney is positive in the medium-term.
“While there is near-term concern about the impact on corporate earnings and from a steeper US curve, we think a pickup in the balance of payments and the real rate cushion will support INR valuations,” said analysts at Morgan Stanley.
7. Long USD/CNH
Capital outflows are likely to affect China over the medium-term leaving the currency overvalued. A strong dollar will boost the USD/CNH.
8. Long BRL/COP
Though in the near-term, BRL is likely to be affected by external risks and political concerns, in the medium-term, “a positive idiosyncratic story and high volatility adjusted carry should keep the currency supported”.
The latest underperformance is a buying opportunity as the reform momentum and high yields will cushion external risks.
9. Long RUB/ZAR
The OPEC output cut is positive for the RUB and the central bank’s “prudent stance” are likely to keep real rates “fairly attractive”.
Though the ZAR side is also showing signs of improvement with the finance minister remaining in place, with US yields moving higher “ZAR is likely to be affected more than most.”
10. Long CHF/JPY
The Bank of Japan is controlling the yield curve, thereby trimming any rally in the JGB yields.
On the other hand, the SNB is likely to be “more tolerant of the CHF”.
The rising and nominal yield differentials will weaken the JPY, while CHF should act as a good eurozone political risk hedge, hence the pair should rally higher.
The Pessimist’s Guide to 2017
This is from Bloomberg, from the people that brought us the 2016 pessimists guide ...
Morgan Stanley make the case for USD/JPY longs into 2017: Rationale, Targets
Our expectation for JPY to weaken broadly and especially versus USD is based on expectations around monetary policy, fiscal policy, the inflation environment and the banking sector. A higher USD/JPY is our highest-conviction trade across the G10 and EM space. We target 125 by 2107-end.
Monetary policy: The BoJ's yield curve control strategy has not only put a cap on the JGB yields below 10y maturity but has also applied a slope. If JGB yields start to rise as a result of rises in global bond yields then the BoJ will buy an unlimited amount of bonds by expanding its balance sheet. In contrast, yields in the US are higher and prone to rising, increasing the yield differential with Japan, supporting USD/JPY. Our economists expect the Fed to hike more than the market expects in 2017, supporting the USD side.
Fiscal policy: Both the US and Japan are expected to expand government spending in 2017, which should support risk appetite and thus could increase Japanese investment abroad. As USD/JPY rises, the incentive to FX-hedge foreign investment reduces, thus adding to upside for this pair. If the Japanese government does choose to increase debt issuance to fund fiscal spending, then the resulting rise in inflation expectations would accelerate the JPY weakness.
Japan's inflation rising faster than nominal yields which are capped by the BoJ should push real yields down. Real yield differentials suggest USD/JPY should currently be trading higher. We expect US nominal yields to rise and real yields to remain fairly muted. Japanese banks seeing a more predictable yield curve may be more incentivized to lend and take on more risk. Lending outside Japan should weaken JPY. Lending inside Japan should raise inflation expectations.
FX hedging: In 1Q16 it was Japanese investors starting to hedge more of their foreign assets that provided JPY strength. As USD/JPY moves higher, we believe that these hedge ratios may change, supporting our trade. The market is still broadly long JPY, which we think needs to shift.
Risks to our view: If global risk appetite turns rapidly weaker due to global growth worries, putting equities under large downward pressure, then Japanese investors may invest less abroad, strengthening JPY. The BoJ cutting interest rates unexpectedly and thus flattening the whole curve again would not.
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Draghi: ECB can buy assets below the deposit rate
Presser from Draghi
The deposit rate comment is a huge dovish signal. They've removed their boundary.
Nomura's 10 'Gray Swan' risks for 2017
3. China floats the yuan
7. A clearing house crisis
Fitch affirms UK at AA; Outlook negative
Fitch rating comments and projections
ECB’s Pessimism Game May Unravel Early in 2017
The ECB’s downbeat stance at Thursday’s policy meeting will undermine the Euro in the short term, but pessimism may be increasingly difficult to justify early in 2017, which would increase the risk of a major market reassessment of the outlook and higher yields.
The ECB decision to extend bond purchases for 9 months at a reduced rate of EUR60bn per month, instead of 6 months at the current rate of EUR80bn, did go against consensus expectations, although the more surprising element of the forecasts was the latest staff projections.
The 2017 GDP forecast was revised fractionally higher to 1.7% from 1.6% previously, while the 2018 forecast was unchanged at 1.6%, with the 2019 rate also at 1.6%.
Similarly, the CPI inflation forecast for 2017 was revised only slightly to 1.3% from 1.2% with the 2018 expectation cut to 1.5% from 1.6% with a 2019 forecast rate of 1.7%.
The latest Markit PMI composite index for the Euro-zone recorded an 11-month high of 53.9 with a strong increase in order backlogs. On the inflation front, input prices increased at the strongest rate since May 2015 with increases in the manufacturing sector at the strongest level for close to five years. There was also an increase in average selling prices for the first time in 15 months.
There has been a further recovery in consumer confidence to the highest levels seen since late 2015; and the unemployment rate declined to the lowest level since July 2009, with a rate of 9.8%. Given these metrics and a very accommodative monetary policy, there should be a significant boost to short-term consumer spending trends.
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Reuters poll: Most US primary dealers see no more than 2 Fed rate hikes in 2017
The latest Reuters poll following Wednesday's FOMC rate hike and more hawkish statement/dots
What PIMCO sees in 2017
Some forecasts from the giant bond fund