Morgan Stanley weekly Forex fundamental analysis

15 May, AtoZForex, London – New week, new Forex outlook by Morgan Stanley for currency investors to acknowledge. The following is Morgan Stanley weekly Forex fundamental analysis for four currencies.

USD: Buy vs commodity & EM currencies – Bullish

The Fed's USD index has surged by 2% since the turn of May, driven by a decrease of extreme USD short positions and a correction in commodity markets which Morgan Stanley expects to continue, proving the old adage “Sell in May.” With Fed Dudley implying that two US interest rate hikes this year remain reasonable, the current market underpricing of the Fed will need to readjust, supporting the USD.

“This week's CPI numbers and FOMC minutes will be important in influencing markets' expectations of the Fed,” Morgan Stanley added.

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EUR: Low yielders to outperform – Neutral

“We believe EUR will outperform high beta EM and commodity currencies as USD rallies, given the ECB's inability to combat global disinflationary forces,” Morgan Stanley noted. In this environment, declining inflation expectations push real yields higher as nominal yields are difficult to nudge lower with much of the yield curve negative.

“We believe that EUR is still likely to be negatively impacted by political developments in the future with Brexit a potential catalyst in the near term,” Morgan Stanley added.

GBP: Beyond Brexit – Bearish

In the short term, Morgan Stanley expects the GBP to remain under selling pressure due to Brexit uncertainty. The polls indicate a close race between the Remain and Leave campaigns and the investment bank thinks that little of this has been priced in.

Looking beyond Brexit, the UK economy is showing signs of fatigue, with the latest weak manufacturing numbers and the BoE's downward revision of its GDP forecast as evidence. As such, “we expect nominal yields to work against the GBP and like selling GBP against USD,” Morgan Stanley projected.

CAD: Weekly Forex fundamental analysis – Bearish

Data in Canada continued to disappoint raising doubts about the chance for an export-led recovery. These factors, in addition to CAD's appreciation and production taken offline due to the wildfires, pose downside risks to the second quarter growth and increase probability that the BoC will start discussing downside risks to its economic outlook. "We like short CAD positions," Morgan Stanley finished its weekly Forex fundamental analysis.

Also see: How to trade: Forex trading strategies

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