Forex Institutional Research: Morgan Stanley FX Daily

Forex Institutional Research: Morgan Stanley FX Daily

Key quotes from the Morgan Stanley FX report: 

The Fed’s broad USD index has weakened for the past two days with the move overnight possibly triggered by a 4.5% rise of oil prices coming on the back to vandalism in Nigeria damaging oil infrastructure.Short-term supply cuts dueto developments in Nigeria or Canada’s wild fire may haveled to short-term position adjustments of speculative traders but thelong-term outlook still has to deal with record high oil inventories (API data) and Saudi Arabia threatening to increaseits oil production again to maintain market share. Notethat Canada’s production is now expected to be back up and running within a few weeks. According to its CEO Amin Nasser,Saudi Aramco will boost capacity at the Shaybah oil field in the Rub Al-Khali desert in southeastern Saudi Arabia by 33 % to 1 mln bpd in the next couple of weeks and will double natural gas production over the next decade. DOE/EIA inventory data will bereleased today showing potentially another increase. Hence any oil prices rises and their negative impact on the USD should remain temporary at this stage.

RBNZ and house prices. In thelatest bi-annual Financial Stability Report, the RBNZ said risks to thefinancial stability outlook haveincreased in the past six months. It highlighted the housing market dilemma within an environment of capital costs falling below the nominal expansion of GDP. New Zealand’s house prices haverisen by 12%Y and now have high priceto income ratios in Auckland in particular.The RBNZ’s Wheeler today madeclear that the bank wants to primarily use macro-prudential measures to deal with house price inflation but did not announce anything new today, disappointing FX and rates traders who wereexpecting new measures,allowing further ratecuts soon.We are bearish on the NZD by year end.

USDJPY has reached 109.38 getting closeto our 109.40 corrective target before easing off. According to Reuters, Japan would interveneat USDJPY 90- 95,citing an interview with special Cabinet adviser Koichi Hamada. Markets may beinclined to test Japan’s authorities pushing USDJPY near to proposed intervention levels.The main reason for projected JPY strength lies in Japan’s financial institutions increasing their currency hedges, reacting to substantial Q1 portfolio losses and Japan’s retail accounts cutting its record carry trade exposure.

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