Forex Institutional Research: Morgan Stanley FX Views
Key quotes from the report:
Morgan Stanley FX Views
Morgan Stabley FX Views: USD
We expect some further legs in the current risk rally, which would likely keep the USD supported against the funders – EUR, JPY and CHF. Economic data out of the United States have been resilient, assuaging concerns about a US recession. However, with the Fed likely to remain on the sidelines for now after the sharp tightening of financial conditions to start the year, USD should in the near term lose ground against high yield FX
We remain short EUR on both a tactical and structural horizon. Near term, the risk rally that we have been calling for is likely to pressure EUR lower, given that the common currency has evolved as the globe’s funding currency of choice. Medium term, the EUR should remain one of the weaker G10 currencies, given expectations for more aggressive policy easing from the ECB next month
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
We use any rebounds in GBPUSD to sell. GBPUSD has seen its initial downward “shock phase” as markets realise there is a non-zero probability of a Brexit. The second leg of GBP downtrend will be based on investors in UK assets looking to put on tail-risk hedges, with selling the currency forming the easiest method. Last year, foreigners had piled into gilts and sovereign wealth funds into UK real estate. Finally, a weak currency may increase hedging needs, pushing GBP towards 1.30.
We still like buying USDCHF and target 1.03 but keep a tight stop. As Brexit risks increase, markets will question the European project as a whole. As the negative risks sentiment is originating from Europe, Swiss investors start to repatriate their foreign investments, strengthening the CHF. Therefore we stay away from long EURCHF positions for now. The focus will be on sight deposit data to see if the SNB used the EURCHF dip to intervene.
We believe that CAD may see a temporary respite in an environment of a more cautious Fed and preliminary signs of strength in the non-resources sector. However, our medium-term narrative remains unchanged. The great rotation that the BoC has been hoping for is still questionable. This week’s trade data will be key in testing our thesis; we will be watching not only the headline number, but also the breakdown between resources and non-resources.
The Chinese authorities have brought back a period of calm, keeping the USDCNY relatively steady. This dampening of volatility and a supportive risk environment is likely to temporarily boost carry trades. This week’s first look at private capital expenditures for the 2016-2017 fiscal year were significantly worse than expected, yet AUD was able to hold steady through it. This suggests that the direction of least resistance in the near term is for a higher AUD.
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