Global FX Strategy | Morgan Stanley

USD: Bullish Following Fed. Neutral.

We previously saw USD beginning to rally in the new year. Following the hawkish Fed meeting, we are bringing forward that expected strength an expect USD to rally in line with the themes we have been discussing. The revising up of the 2017 dots and the neutral rate, along with Yellen’s pushback on her support for an overheating economy, are all hawkish signs and more reason for the rates market to reprice higher. Next year, major policy initiatives as a result of the US election are likely to be USD positive, including fiscal stimulus, risk of protectionism and corporate tax reform. USD strength will be most pronounced against the low yielders like JPY

EUR: Making New Lows. Bearish

Amidst the broad USD strength from a hawkish Fed, EURUSD has reached the lowest level since January 2003, giving it more momentum to the downside. We expect EURUSD could continue to the head towards parity driven by USD strength and an accommodative ECB. The ECB allowing purchases of bonds in the 2 year tenor and below the depo rate weaknes the EUR by lowering frontand yield diffrentials which EURUSD is more sensitive to and steepening the yield curve which will help bank profitability and encourage the export of capital.

GBP: Potential for Rebound. Bullish

We maintain the view that GBPUSD could tactically rebound to 1.30/1.31 going into year end. With the BoE maintaining its neutral stance, coupled with recent UK data such as CPI and retail sales holding up well, the downside in GBP is likely to be capped. GBP also has a high ‘hard Brexit’ risk premium priced in, and with recent news indicating that this is lessening, there is potential for some ‘hard Brexit’ discount to be priced out. We remain short EUR/GBP

CHF: More Strenght Tolerated. Neutral.

We continue to look for CHF strength against selected currencies such as JPY. The latest SNB meeting adds further support to our argument that the SNB may more tolerant of CHF strength. The statement that they will intervene “ while taking the overall currency situation into consideration” suggests that they may focus more on the CHF TWI which is not at extreme levels, allowing more room for CHF appreciation. With a busy Eurozone political risk calendar in 2017, CHF could also benefit from safe haven demand.

CAD: Best Performing Commodity Currency. Bullish.

We expect CAD to outperform other commodity currencies. CAD is not as vulnerable as MXN to trade protectionism given a prior free trade agreement which would take effect if the US backs out of NAFTA, though this still remains a risk. However, a better US economic outlook (from otherpolicies like fiscal stimulus) should benefit Canada. Data has remained weak with this week’s poor manufacturing sales report following a poor trade report last week. However, last week’s BoC meeting provided no suprises and while the Bank pointed out uncertainties around the outlook, it reaffirmed its neutral bias and made clear the bar for easing is high. Poloz noted that it would take a “ significant departure” in the outlook for easing, supporting ourview.

NZD: Outperformance vs AUD. Neutral.

We expect NZD to outperform AUD but weaken against USD.New Zealand’s economic outlook has improved with high migration and booming housing supporting growth. The half-year update this week from Bill English confirmed this, with growth being revised higher and rising budget surpluses. This is likely to be enough to offset the RBNZ worries over the inflation outlook and in particular, the exchange rate. However, we don’t rule out another rate cut or evem FX intervention, though the latter would occur only after substantially more FX appreciation. We expect NZDUSD to continue to depreciate due to the USD rally but we expect NZD outperformance of AUD I the near term unless we see worsening data in New Zealand or dovish rhetoric from the RBNZ

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