Weekly outlook from Morgan Stanley

18 October, AtoZForex.com, London – Going forward into the new week, Morgan Stanley has provided a fresh weekly outlook for G10 picks. With the weakness of USD persisting, the underlying sentiment remains shifting away.

USD: Into retracement – Bearish

“We expect the USD retracement to continue for a few more weeks, as there is room for further positioning clear out in many EM currencies,” MS begins. Dovish Fed has forced the market to push back the timing of the first interest hike, and soft US data did not help either. Markets are likely to listen to the Fed closely going forward for a less dovish tone.

EUR: Not dovish ECB – Bullish

“We believe that EURUSD could head higher before we see pushback from the ECB,” points Morgan. Indeed, MS doesn’t expect any changes from Thursday’s meeting. “Our base case is for no further easing.” However, if the central bank would decide to take action it would come in December alongside the ECB’s new outlook. Therefore, with the ECB likely on hold in the near term, and US rates decreasing, EUR is decreasingly less attractive as a short term funder, offering its support.

JPY: BoJ not easing yet – Bullish

Despite the current risk backdrop, MS expects JPY to be supported. Recent BoJ comments have downplayed the prospect of further easing. Furthermore, several inflation measures of CPI ex-fresh food and energy, and the daily UTokyo CPI have recently been appreciating and displaying positive dynamics.

GBP: Dovishness in the price – Neutral

“We expect GBP to see support in the current environment as risk generally rallies. With markets having pushed a rate hike further into 2016, we believe the risks are now skewed towards the pricing of hikes being brought forward, rather than later,” Morgan argues. UK fundamentals have been mixed outside of inflation, which could provide ground going forward. Therefore, while MS expects GBP to outperform against USD, it should underperform versus EUR.

AUD: Relief rally – Bullish

“We think AUD could see further support in the near term as the risk rally continues,” the bank notes. Increasing expectations for a rate cut might result in an opportunity to long AUD at better levels, MS advises, as the bank does not think that rising mortgage rates will suffice to drive further RBA easing. In addition, China remains stabilised, resulting in a positive risk-off environment for AUD.

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