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What Morgan Stanley expects this week in FX

Morgan Stanley on USD, JPY, CHF, CAD, AUD and NZD

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USD: The End of an Era. Bullish.

We believe that USD is likely to outperform into the first Fed hike. The market is not pricing a March hike, and risks are skewed towards the market increasing the chance of a faster pace in the hiking cycle. Outperformance should be focused against commodity currencies and EM, given the downtrend in commodity prices recently and the somewhat hawkish ECB meeting last week.

JPY: G10 Outperformer. Bullish.

We continue to hold a bullish JPY view. Much of the GPIF rebalancing has already occurred, and therefore JPY should lose this headwind. In addition, the GPIF has said that it is ready to hedge its FX exposure to protect against losses, which should offer further support to JPY. Finally, we believe that risk appetite could fade, given the latest slowdown in global trade and the approaching Fed hike.

CHF: Selling CHFJPY. Bearish.

The SNB remaining on hold but talking about intervening in FX markets when required has kept CHF weak. The SNB has said that all new money created by the SNB and circled back to the bank is going to be charged at the negative rate as most exceptions have been exhausted. Weak global risk appetite has supported CHF, but we expect this to be temporary effect for CHF in particular, so would use the rebound to sell CHFJPY.

CAD: 3Q a Head Fake? Bearish

We think that the market is still underestimating the fragility of the recovery in Canada and think there is more scope for USDCAD to rise as markets price in a greater chance of BoC easing. Following weak trade data on Friday and Poloz's speech this week, markets seems to be realizing that 3Q was a likely a head fake and 4Q is not looking good. Furthermore, Canadian oil prices have fallen near the post-crisis lows.

AUD: A Deteriorating Picture. Bearish.

The outlook for AUD continues to deteriorate. Australian terms of trade has maintained its sharp downward trend, with iron ore prices decisively breaking below recent lows. Capital expenditures have fallen in line with this, and are expected to fall in the upcoming fiscal year, with little rotation away from the non-resources sector in Australia. Global trade remains soft, seen in the latest Asian trade numbers. We remain bearish AUD.

NZD: Not as Optimistic as the RBNZ. Bearish.

Weak global risk appetite, low milk prices relative to a year ago and rising funding costs are all negative for NZD. Inflation remains low and terms of trade unfavorable for NZD. This week the market's reaction to the Fed will be important. NZD is a high-beta currency so in the latter part of the week will likely respond more to the USD side rather than New Zealand events. We remain bearish for the medium term.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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