Forex Institutional Research: Morgan Stanley FX Views
Key quotes from the Morgan Stanley report:
We think the current USD fall will run out of steam. The catalysts for a turnaround back to a USD rally will be either strong US data confirming the need for tighter monetary policy in the US this year or other central banks globally fighting back against their own currency strength. In the short term FX rates can be influenced by central bank action but longer term it’s about the growth outlook relative to the rest of the world
Should the US economic data improve as we expect, US yields are likely to push higher. Meanwhile, the ECB’s ongoing large purchase program is likely to continue to weigh on European yields. Both growth and rate differentials will weigh on the EUR and long term capital exports are likely to accelerate. Add political risk into the mix and we think that the EUR will be structurally skewed lower, and will reclaim its spot as the globe’s preferred funding vehicle.
The asset outlook is key to determining the direction of the JPY. Indeed, with domestic stocks falling sharply post BoJ easing, Japanese investors needed to quickly scale back risk exposure. The easiest and most liquid way to perform such an operation is through the FX markets, hedging foreign exposure. As such, with risk markets recovering, this should limit the scale of foreign hedging
Should the USD uptrend resume as we forecast, GBP is likely to come under pressure from multiple angles. First, a higher dollar should weigh on commodity prices. Such would adversely impact GBP via a downward adjustment in the UK’s income balance. Second, a higher dollar also shrinks global liquidity, which would make it more difficult for the UK to acquire the foreign funding necessary to balance its external deficit. Add to this increasing political risk, GBP shorts are one of the most attractive ways to express a long USD position, in our view.
The USD rally from mid-October to the start of the year was driven by growth weakness in the emerging world resulting in repatriation flows back into the United States. As a result, USD strength was concentrated against the emerging markets. The next leg of the USD uptrend we believe will be driven by higher US yields amid stronger US growth. As such, we think USD will gain first against the low yielders, with CHF being squarely in that camp
Given improving data, supportive fiscal policy and higher oil prices, we are no longer bearish CAD now and believe it will outperform other commodity currencies. This week’s federal budget release showed a projected C$30b deficit for FY 16, in line with expectations but still large enough to provide some boost to growth in the next two years. Meanwhile, data has improved with strong non-commodity exports and manufacturing sales, which should also support the BoC’s constructive tone. However, CAD is still at risk should oil prices fall significantly from these levels
Rebounding iron ore prices and stronger-than-expected labour market data have provided support for AUD. However, the AUD TWI is nearing levels which the RBA is uncomfortable with, as evidenced by Stevens’ recent remarks.. We believe that the RBA is a central bank that has room to cut if it wishes, unlike some other global banks we follow that have already adopted aggressive easing policies. We have added short AUDUSD to our FX Pulse portfolio
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