Forex Institutional Research: Morgan Stanley FX Daily
Key quotes from the Morgan Stanley report:
We remain USD bulls and see the current leg seeing the most gains against the higher-yielding currencies and the commodity bloc.Egypt’s devaluation and the RMB’s TWI breaking below the lower boundary of its recent trading range have increased USD demand again. Importantly, the BoJ’s Kuroda suggested overnight that the BoJ could take its deposit rate down to – 0.5% without jeopardising the functionality of JPY markets.This comment poured cold water on the opinion that the Shanghai meeting may have agreed to usethe negative rate tool less often to keep FX markets more stable, hence providing less demand for USD
Can rates guide FX
The problem is that FX markets tend to be faster than rate markets. A Fed indicating a tightening bias within a world of falling investment returns is good enough to see USD breaking higher. In the end it will be USD doing the tightening job,explaining why we project a good USD rally, but the Fed only tightening one time late this year.We remain long USD against NZD, BRL and GBP.
GBP has gone back to its relationship with oil and equities, meaning we see further weakness this week.Longer term the growth outlook for the economy will likely steer the currency too.Today Chancellor Osborne will release his Spring budget. Most of the details have been released in the press so GBP is not likely to respond to that today, but it is more important whether any fiscal tightness could cause weakness in the economy further down the line. Of note today is that Osborne’s room for manoeuvre is small ahead of the June 23 referendum. Should against our expectations the budget contain unpopular fiscal tightness, the impact on GBP could be significant. It would impose more pro-cyclical fiscal constraints, weakening the already sluggish economy further,and it would darken the referendum outlook. Tomorrow the BoE will be in focus, with the risks rising for a member or two to vote for a rate cut
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