Forex Institutional Research: Morgan Stanley FX Daily

Forex Institutional Research: Morgan Stanley FX Daily

Key quotes from the Morgan Stanley FX report: 

Shifting from reflation towards deflation trades.The global reflation trade which started on 11 February has run its course with global equity markets now in retreat. Asia’s markets have been declining for 7 days in a row, the longest losing streak for a year. Risk sensitive currencies have come under selling pressure with eg KRW losing 0.8% overnight.Elsewhere, the TRY slumped to a 2m low vs the USD after media reports that the prime minister may step aside, delivering a fresh reversal to a strong 2016 emerging-markets rally.We remain short TRY in our Pulse portfolio.Selling the EM / commodity currency block vs EUR, CHF or JPY remains lucrative.

Sharply lower iron ore prices. Oil has remained relatively steady supported by the US reporting its output falling by 113k barrels to 8.83mln/day last week, reaching its lowest output level since September 2014. However, oil inventories have kept rising, reaching record levels suggesting that despite weaker US production, the supply/demand imbalance has remained in place. We suggest being short CAD within the G10 space.This morning iron ore futures on the Dalian exchange declined by 4.7%, falling the third day in a row showing the lowest daily close since 15th August. Copper declined by the third day too, but was only down by a moderate 0.4%.

….support EUR, CHF, JPY.There where yield curves are most ‘exhausted’ i.e. trading in negative yield territory,are where we would expect real yields to break higher, pushing those currencies higher too. JPY, CHF and EUR fall into this category.For now markets are busy reducing bearish USD positions providing USDJPY with some upside. However, on the crosses theJPY should remain strong.Today Abe will speak in London. Anything less than discussing helicopter money or debt monetisation will keep the medium-term JPY uptrend in place.

CADJPY shorts offer medium term potential, supported in particular when risk appetite and commodities decline, which we expect over the coming weeks. Yesterday saw Canada reporting a record trade deficit if CAD 3.41bln exceeding the July 2012 deficit, due to a 4.8% fall in exports. USDCAD positioning is bearish. A stronger than expected US NFP (market expect 200K after 215k) has the potential to push USDCAD sharply higher.

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