Morgan Stanley Talk Currencies
Below is a weekly macro outlook from Morgan Stanley bank for particular currencies. The biggest movers this week are FED and Bank Of Japan and their decisions may be crucial for the USD and JPY.
USD – Fed to Weaken USD
Morgan Stanley thinks a dovish Fed over the next few months will help weaken USD. 3Q growth has bounced back but US data has been worse than expected, including last week’s retail sales print, setting up for a weak 4Q quarter as the Fed contemplates additional rate hikes. Morgan Stanley also argues that even if the Fed hikes – which is not the bank’s base case – it will be a ’dovish’ hike followed by a long pause and the neutral real rate will stay depressed, keeping risk supported and long-term yields low. A risk-off environment is certainly a risk but MS doesn’t expect higher yields and steeper curves to cause the months long risk rally to be derailed. Therefore, EM/ currencies should continue to perform well against USD.
JPY – More Room for a Sell-Off
Morgan Stanley also think the JPY has room to weaken should the Bank of Japan credibly raise inflation expectations at the upcoming meeting. The Bank of Japan has shown signs of changing its approach by reducing long-term bond purchases, helping the JGB curve to steepen. A steeper yield curve helps improve banks’ profitability, increasing their ability to take more foreign FX risk onto their balance sheets by buying foreign assets, generating outflows to weaken the JPY. However, Morgan Stanley ultimately expects the JPY weakness to reverse if the Bank Of Japan sticks to its existing monetary toolbox at the September meeting. We write more on Bank Of Japan in our latest currency report.
NZD – Economy Remains Strong / Bullish
There are many reasons to be bullish on the NZD. The first one is technical, as the NZD is the highest beta currency in G10 so when the USD weakens, the NZD strengthens. Fundamentally, dairy prices continue to rise, the housing markets remains supported and consumption data is coming in strong. The last week’s 2Q GDP print showed the economy is accelerating again. Inflation remains low, but even if the RBNZ cuts rates, it is difficult for the central bank to weaken the currency in a time when markets are looking for anything high yield. However, NZD remains vulnerable to a risk-off period and from aggressive OCR cuts in response to a too high TWI.
EUR – Holding a Bullish Stance
The bank remains bullish on the EURO and is adding a long EUR/USD position today to express a bearish USD view into the Fed. EMU’s financial institutions have weak balance sheets and their profitability has reduced due to low yields and flat yield curves. This reduces their willingness and ability to add risk onto their balance sheets, prompting them to reduce their foreign FX-denominated holdings. This results in the lack of long-term capital exports to offset the commercial demand from the EMU’s 3% of GDP current account surplus, supporting the EUR. MS promotes buying EUR against USD.
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