Morgan Stanley Weekly outlook on Majors

Morgan Stanley weekly outlook, AUD, China, EUR, GBP, Grexit, JPY, Morgan Stanley, USD

17 August,, Vilnius – Morgan Stanley has provided its latest weekly outlook on majors. The following are the bank’s views and projections for traders to acknowledge.

USD: Strength towards commodities and EM, bullish

To commence the latest Morgan Stanley weekly outlook, let’s have a look at the dollar. As Morgan Stanley notes that the “USD strength will be focused against EM (Emerging Markets) and commodity currencies going forwards, with AxJ particularly underperforming.” This is largely due to recent CNY move, nevertheless, it also reflects development differentials and structurally devalued commodity prices. “However, we would expect the path against other G10 currencies to be driven more by data into September, as the market watches the Fed closely,” MS adds.

EUR: Victor from CNY moves, bullish

Morgan believe that Euro ought to benefit from the recent developments in China. RMB moves might result in general asset market volatility, reinforcing currencies with account surpluses that were used to fund risky positions, as investors unfold their delicate holding. EUR is one of such currencies. Moreover, as many investors unwound their hedged European equity positions, the result leads to buying back of hedges, further reinforcing the Euro.

JPY: In the middle of crosswinds, neutral

MS thinks Yen is likely to experience contradicting forces as a result of the developments in China. From the one side, weaker CNY might result in disinflationary pressure in Japan. Furthermore, the China impact challenges Japanese competitiveness as well, having influence on the Real Effective Exchange Rate (REER). On the other side, uncertainty covering CNY should de-stabilize risk appetite, resulting in repatriation and providing ground to JPY. “Overall, we expect the latter effect to win out in impact, but recognize the risks,” MS concludes.

GBP: Better-off against commodity FX, neutral

Following the dovish inflation report and weakened risk appetite GBP has faced some headwinds. Nevertheless, having China developments on markets’ minds and the Fed returning back, “we believe GBPUSD is going to be driven more by the USD side of the pair,” MS points. Yet, the BoE remains one of the central banks moving towards a rate hike on the turn of the year, thus GBP ought to be supported. “Here we like to buy against the more vulnerable commodity currencies (CAD, NOK and AUD),” Morgan advises.

AUD: Close trade with CNY, bearish

Morgan thinks that the Australian Dollar should be an underperformer after last week’s developments in China, although stabilization in the near-term might bring some relief for the AUD. However, providing the fact of close China’s trade with Australia, any CNY weakness will lead to de facto AUD REER appreciation, which may be countered by AUDUSD weakness in order to maintain competitiveness,Morgan Stanley finished.

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