MS weekly outlook ahead of NFP

01 November,, London – Having the Fed undecided should they, or not, raise interest rates and with upcoming Payrolls report on Friday, Morgan Stanley shared its weekly outlook ahead of NFP.

USD: Back on track – Bullish

The Fed has put the December rate hike back on the table after surprising the markets by sounding more hawkish than expected. “We now expect a more bullish USD going forward, as investment works its way into the US. Strength is likely to be concentrated against G10 currencies and low-yielding AxJ,” MS projects. Going forward, data prints will be increasingly important for the Fed, especially having US Payrolls on Friday, as a December hike is now in the balance.

EUR: The Draghi Put – Bearish

Morgan believes EUR to be a clear underperformer against a backdrop of hawkish Fed. The monetary policy divergence should increase EUR funding status, and MS believes that EUR could retest the year-to-date lows at 1.046. However, “a combination of ECB action, including a deposit rate cut together with further QE in a broadly risk-positive environment, would be required for sustained EUR weakness,” the major bank adds.

GBP: Focus on BoE – Neutral

“We have turned tactically bearish on GBPUSD, targeting 1.4850, MS points.  Not only did GDP data in the past week undershoot the expectations, but also the BoE Carney’s tone started changing to dovish. We could expect more dovish commentary from the central bank now that the pace of economic growth is below the requirement set for a rate hike by Carney. Into the week, the Services PMI print and BoE Inflation Report will be under the spotlight.

CHF: Diverging policy – Bearish

“Diverging monetary policies between the ECB and the Fed support long USDCHF positions again,” the bank notes. Technically looking USDCHF has broken above the high of 0.99 in August, supporting upside momentum. Moreover, probableaggressive ECB actions in December might force the SNB to cut rates further in coming months, if the Swiss central bank will see a risk to EURCHF devaluing by too much. The SNB’s Zurbruegg argued that the central bank would need to reassess the situation and that it cannot be told in advance how low rates could go.

AUD: End of rally – Bearish

“We believe that the period of AUD strength is behind us and now expect further losses.” In addition to the renewed bullish USD environment, we also have rising risks of a rate cut at the forthcoming RBA meeting as the latest inflation data undershot the consensus. Worth noting that Iron ore prices have started devaluing once again further weighing on the Australian Dollar. AUD could now catch up with its commodity currency peers, heading back towards the lows,” Morgan Stanley concluded.

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