Forex Institutional Research: Morgan Stanley FX Daily
Key quotes from the report:
Risk Positive Sentiment
Morgan Stanley: Our risk-positive assessment has remained intact supported by a US labour US labour market report market report showing an above consensus 242k employment increase while wage growth has remained subdued. The Fed Fed’s March meeting should see its dots coming down, as the FOMC FOMC adjusts its own expectations relative to markets’ view, namely that there will only be a slow move towards higher rates. The adjustment of dots should be accompanied by relatively dovish Fed commentary, keeping risk markets supported for now.
EURUSD Corrective Top
EURUSD trades a corrective top.The ECB will be in focus ECB will be in focus when it meets on Thursday. With negative rate criticism becoming wide spread, reaching from the G20 towards a weekend report by the BIS suggesting that long-term costs of negative rates exceed short-term benefits, markets are becoming increasingly sceptical about this instrument. The BIS makes the valid point suggesting that negative rates could lead to behavioural changes, citing Switzerland as an example where the move towards negative rates made mortgage yields move higher mortgage yields move higher. Hence, the ECB may not deliver on the rates front more than what is currently priced in. Instead, it may consider other innovative tools aim at pushing more money into the system. Different to December when easing expectations grew ahead of the ECB meeting, markets have become more realistic, suggesting the ECB delivering beyond expectations could put the EUR under renewed selling pressure. On Friday, EURUSD tested its 200DMA, coming in at 1.1045, but failure to develop a daily closing price above 1.10 today suggests to us that a corrective high has been traded, opening renewed downside potential. Today’s EU meeting will be important for the EUR and GBP today. The FT is reporting FT is reporting that the EU plans to set up a central hub for processing migrants and then redistribute to countries from there. This could increase the euroscepticism within the UK and could increase Brexit risks, putting downward pressure on GBP once again
USDJPY To Hold 113.15
USDJPY should remain above 113.15 despite the BoJ’s Kuroda leaving the impression that the bank will not aim for further easing measures at the March 15 meeting. Insurance companies led the equity market lower today, illustrating the dilemma in which the BoJ BoJ is operating. Reading Kuroda’s comments carefully left the impression that a further cut of the deposit rate can be ruled out for now. Here Kuroda reiterated comments made earlier last week. What the BoJ should do is to take measures supporting demand, enhancing portfolio effects such as buying REITS, ETFs on shares and other private assets. Today’s speech was interpreted as the BoJ delaying action into late spring, explaining the equity market’s bearish reaction.
Unless the BoJ BoJ cut its deposit rates without accompanying this move by buying private assets, Japan is unlikely to determine the global risk appetite. Instead, the current corrective risk rally should find its support from US, as the Fed’s pause on hiking rates has created a sweet spot and rallying commodity markets leave the impression that global demand has improved over recent weeks. Indeed, Brent has reached US$39and iron ore futures were limit up this morning in Asia trading. It is the strong rise of commodity prices that allows us to ignore Australian job advertisements falling by 1.2%, the largest decline for a year. Rising commodity prices will improve terms-of-trade-related income in Australia, keeping AUDUSD supported for now. We reiterate our AUDUSD target of 0.77
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