Morgan Stanley's Weekly Outlook
USD: to remain range bound. Neutral.
US data has improved significantly over the last few weeks and is likely exceeding the low bar the Fed set for a December hike. Given election uncertainty, we expect markets to continue to price a December hike as the likely outcome but not deviate far from current pricing. In this environment, we would expect USD to continue to appreciate against JPY and some other G10 currencies but remain largely offered against EM. Ultimately, it will be the data over the next 2 months which will prove decisive on whether the Fed ultimately hikes in December.
EUR: Watch Banks and Inflation. Bullish.
We stay bullish on EUR. In ourview, worries about the European banking sector are actually bullish for the currency as it may lead to EMU banks liquidating their foreign assets and bringing the money back home. Recent ECB commentary has also cautioned about low/negative interest rates, suggesting that there may be few cuts left in the ECB's toolbox. Global and EMU inflation also ticked up in September which, if sustained, could lead to a reduction in the pricing of ECB rate cuts (10bp cut priced by end 2017), providing support for the currency. We remain long EURUSD in our portfolio*, which is forming a triangular structure with the upper end around 1.1240 and lower end at 1.1150.
CHF: SNB Keeping EURCHF Range Bound. Bullish.
We expect worries around the EMU banking sector to give CHF a strengthening bias, but with the SNB standing ready to intervene, the downside for EURCHF is likely to be limited to 1.0750, keeping the pair within its 1.0750-1.11 trading range. Even though Switzerland's CPI has recovered in 2016, we do not expect the SNB to change its policy anytime soon, given the SNB lowered its 2017 and 2018 inflation forecasts in its last statement and the IMF supporting the SNB's use ofvery negative interest rates and FX interventions to support inflation. We watch FX reserves this week to see if the SNB intervened in September to weaken CHF when worries about the EMU banking sector intensified.
CAD: Bearish Supported by BoC. Bearish.
We remain bearish on CAD, with the latest change in the BoC's stance adding support to ourview. In its latest meeting, the BoC stated that inflation risks have tilted somewhat to the downside and growth may be somewhat lower than anticipated in July, softening the hawkish tone that it had been adopting so far despite weak economic data. This increases the possibility of the BoC cutting rates this year, particularly in light of weakening inflation data. 3Q growth expectations have improved somewhat in recent weeks due to better July GDP and a narrower trade deficit but we are still skeptical the BoC's forecasts will be reached. Given the markets are pricing only a few bps of rate cuts for this year, and CAD has the largest long positioning in G10, we think further data weakness could weaken CAD significantly. We like selling CAD against other commodity currencies.
AUD: Further Upside. Bullish.
We think AUD has further room to appreciate if risk remains supported and data continues to improve. This week's retail sales and trade data were better than expected and point to strong 3Q growth and Gov. Lowe's first meeting last week showed no real change to the RBA's outlook or framework. We think they will remain on hold throughout 2016 and record building approvals data is another sign that risks of further rate cuts to financial stability remain high. With AUDUSD at 0.76, it still has room to go higher before the RBA becomes too worried about overvaluation.
NZD: Underperformance vs AUD. Neutral.
We are somewhat bullish NZD but expect it to weaken vs AUD. The RBNZ changed its most recent statement very little despite improving growth data and milk prices and also pointed to slowing house price appreciation. Nonetheless, we believe only an aggressive easing cycle will change the trend in NZD and we won't get more clarity on this until the November MPS. Inflation remains low, but even if the RBNZ does small amounts of easing, it is difficult for the central bank to weaken the currency in a time when markets are looking for anything high yield.
