Forex Institutional Research: Morgan Stanley FX Views
Key quotes from the Morgan Stanley FX report:
The Fed minutes have supported our bullish USD view, and we see scope for further gains. As long as the Fed wants optionality on a June rate hike, rate hike expectations are likely to increase and higher yields should support USD. At the same time, the global economic backdrop has worsened, with China data weakening, and risk appetite has weakened. We don’t expect much from Yellen tomorrow but are watching core PCE and payrolls next week closely for evidence of improving economic data. We like buying USD against commodity currencies and EM.
We expect EURUSD to remain fairly range-bound. This week’s CPI and ECB rates decision will be watched, but we do not think they will impact EUR significantly. Our economists are not expecting any policy change from the ECB, though inflation and growth projections could be revised upwards due to higher oil prices. We think this will not impact EUR meaningfully as the markets are only pricing a 5bp rate cut for this year, and the ECB has made it clear that further rate cuts are unlikely, implying yield differentials affecting EUR will continue to be driven by the Fed
Our long-term view on JPY remains unchanged, though there is scope for USDJPY to rise on the back of broad USD strength, higher US yields and strong risk appetite. Nonetheless, this is a rally we would sell into, given our structurally bullish JPY view. We don’t expect intervention, particularly in light of the current G7 meeting, and don’t expect fiscal stimulus to change the trajectory on JPY. FX hedging and repatriation flows will continue to dominate, and we ultimately expect USDJPY to fall through 100.
GBP has outperformed in recent weeks due to markets reducing the probability of Brexit. We think the markets may have become a little too complacent and the risk profile is now asymmetric, with the risks skewed to the downside. Any turn in the survey data should put GBP under renewed selling pressure. In the longer term, we are also bearish on GBP due to its weakening economy and triple deficit. This week, we watch to see if manufacturing PMI confirms our view of a faltering UK economy.
We think USDCHF will continue to be driven higher by broad USD appreciation on the back of strong US data and market repricing of an earlier-than-expected Fed rate hike. EURCHF, on the other hand, is likely to remain fairly range-bound. In the medium term, we expect CHF to be supported by real yield differentials and the many European political risk events in June.
We maintain our bearish view on CAD following the BoC meeting as we believe it was not as hawkish as the market took it and expect further economic weakness will cause markets to price a higher chance of rate cuts. The BoC did not have a large shift in tone but some dovish changes, on capex and the wildfires, open the door for a larger shift at the July meeting (which is accompanied by an MPR). Canada’s rotation away from the resource sector is in doubt, with weak March trade showing non-commodity export volumes falling an additional 2% after their nearly 5% fall in February. We are watching next week’s GDP and trade data closely.
We remain bearish AUD and expect the RBA easing to push AUD lower. We believe the market overreacted to the RBA minutes and the SMP makes clear that the RBA stands ready to act further, given the very weak inflation trend. Given the worrying inflation trend, falling house price growth and iron ore prices resuming their downward trend, our economists are now expecting 75bp more rate cuts. RBA Governor Stevens’ comments this week echo our view that the RBA will gladly watch AUD depreciate in order to help the difficult adjustment. We continue to like holding AUD short positions.
These notes are intended for information purposes only and are a small sample of the institutional content we post daily within our Trading Hub including full research notes, flow reports and trade desk commentary with trader views