Start the new trading week with Morgan Stanley G4 Forex outlook, ahead of the FOMC meeting later this week. This week’s brief insight into the major currencies, EUR,GBP, JPY and USD. Strong US Dollar?
Morgan Stanley G4 Forex outlook
EUR: Bearish bias – EUR weakened by ECB
EUR expected to weaken after last weeks ECB meeting. With ECB aiming for financial stability, by supporting the bond markets. This was clearly indicated with the decision with QE extention at the same time a reduction in the size of the program.
Short end bond yields will remain low, and the decision by the ECB to allow purchases of bonds in the 2-year sector at rates well below the deposit rates , will hurt the EUR.
Morgan Stangley added..
“… We sell EUR against GBP this week.* “
GBP: Bullish bias – Scope for Risk Premium reduction.
GBP outlook remains, with the possibility of GBPUSD rebounding off the 1.30/1.31 level in the near term, with the possibility pricing out of the hard Brexit GBP risk premium. News of UK possibly paying for access to the single market, a hard Brexit seems unlikely. UK PM Theresa May agreeing to the condition that MP’s could have their say on the final exit plan, has made hard Brexit even more challenging. The market’s GBP large short position remains unchanged. Morgan Stanley’s added ….
“… suggesting that any GBP rally could be helped by an adjustment of the large short positions. We buy GBP against EUR in our portfolio this week.* “
JPY: Neutral – Consolidation until end of 2016
Possibility of USDJPY correction lower in the short term, as current USD upside move wanes as we approach the end of 2016. US yields expected to consolidate at current levels. USDJPY bullish bias outlook in the medium term is supported by the reflationary impulses. USDJPY bullish bias is strong in the coming year, with positive risk appetite and fiscal stimulus-led yield curve steepening. Morgan Stanley view is …
” The BoJ’s yield curve management should ensure that global yield curve steepening pushes rate differentials against JPY. We look to buy USDJPY dips near 112.”
USD: Neutral bias – Correction until end of 2016.
USD outlook remains bullish for 2017. However, until the end of 2016 expect a correction as the most likely scenario. These three major policy initiatives, are expected to be positive for the US dollar. Morgan Stanley expectation is for the FED to increase rates six (6) times by year end 2018. With December rate hike fully priced in and no fiscal changes expected, until these occur. FED has little room push bond yields to the upside. Morgan Stanley additionally added …
“.. USD strength will be most pronounced against low yielders like JPY. Improving data in recent weeks supports our call as well.”
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