Forex Institutional Research: Morgan Stanley FX Daily
Key quotes from the Morgan Stanley FX report:
The Fed is running a ‘triple put’ and the impact of this enlarged Fed safety net could be seen yesterday. Although the failed Doha meeting led to some commentators suggesting an effective break of the OPEC cartel, USD declined while oil recovered from earlier losses.The Russell 2000 has closed above its 200DMA and the Dow Jones has reached its highest level since July, suggesting that the’Fed put’ works on the US side too, supported by further gains of US high yield markets, suggesting that the risk premium is in decline. EM and commodity currencies should remain supported today.
Risk versus inflation:The US will be able to run a more global mandate as long as its domestic inflation outlook remains benign. Its capacity utilisation rate falling 4% from its November 2014 high of 78.9 indicates that the global deflationary pressure within tradable good sectors such as manufacturing goods will help to keep US inflation benign for now. Domestically generated service sector inflation seems more a threat to the Fed’s enlarged responsibilities, but even here there seems no immediate danger. No wonder that market pricing for the 25bp hike is not until July 2017.
GBP rebound: With risk premia coming down globally, investors will be looking around for laggards. GBP’s risk premium has remained high for very good reasons, mostly associated with the upcoming June 23 EU referendum. However, with risk premia melting away elsewhere, we think GBP will look increasingly supported.From now it may take persistently bad news to keep GBP near current levels, while a marginal improvement in the news flow may be already sufficient to push GBP higher.
USDJPY targets 112.50: With the start of a new Japanese reserve period, the JPY OIS rate has declined by 4.5bp to -7.5bp, suggesting that lower rates are now passed through to asset managers. Buoyant global risk appetite driven by the Fed’s broadened mandate reducing the global USD shortage has put Japan’s JPY supportive repatriation flow to hold for now. USDJPY has the potential for a short-term rebound to 112.50, where we would sell again
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