Weekly forecast - page 18
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EUR, JPY, GBP, CHF, CAD, AUD, NZD: Weekly Outlook - Morgan Stanley
EUR: The Next JPY. Neutral.
Following the UK's vote to leave, the fall in EUR was relatively muted, supporting our view that EUR could stay strong under almost all scenarios. With German bond yields falling into negative territory, the room for nominal yields to move lower is limited. The risk of a sudden decline in inflation expectations outpacing the fall in nominal yields has risen, which should push real yields up in support of EUR. As domestic EMU banks reduce long-term foreign asset purchases to consolidate their balance sheets, the commercial buying needs from the EMU's current account surplus will likely outweigh long-term capital outflows, preventing EUR from weakening.
JPY: Staying Strong. Bullish.
The UK's vote to leave has helped USDJPY break below 100, fuelling speculation of FX intervention by the MoF. However, Japan is on the US Treasury's list of potential currency manipulators, so it is unlikely to intervene unless it gets approval from the G7. The G7 may agree only to volatility-reducing operations, so any USDJPY appreciation is likely to be temporary and USDJPY will probably continue its march lower due to real yield differentials, hedging flows and the ineffectiveness of conventional monetary and fiscal policy tools in weakening JPY.
GBP: Shorts Offer Good Risk/Reward. Bearish.
We think GBPUSD could continue its decline to 1.25 after the vote to leave. The UK needs foreign investment inflows to fund its 7% of GDP current account deficit, but the vote to leave could cause a decline in cross-border flows. For foreign investors to be attracted to the UK, either GBP has to depreciate to make UK assets cheaper, or UK assets need to offer a higher yield. Given that the UK sovereign yield curve lies below the US yield curve for all maturities beyond 1y, it seems more likely that it will be the FX depreciation doing the work. Hence, we think the risk/ reward of going short GBP against JPY, EUR and USD at current levels is attractive.
CHF: Real Yield Support. Bullish.
The UK's vote to leave the EU could give a boost to rising populism in Europe, potentially creating more political uncertainty, which would help CHF strengthen. As a large part of Switzerland's sovereign yield curve is in negative territory, the room for nominal yields to fall further is limited. In a deflationary, slow growth environment, inflation expectations are likely to fall faster than nominal yields, driving real yields higher, supporting the currency. Any rapid appreciation of CHF will probably be met with intervention from the SNB, but a slow grind higher should be acceptable.
CAD: Fundamentally Bearish. Bearish.
The inverse correlation between oil and USD is expected to stay strong, keeping the oilsensitive CAD weak. We maintain our bearish view on CAD as we believe the market isn't pricing enough downside risks to the outlook, though we see scope for further strengthening if risk performs well. The BoC has maintained an upbeat tone with Poloz arguing that the economy is making "real progress" and supporting a wait-and-see approach to the recent wildfires and trade data. However, we are still skeptical of Canada's rotation away from the resource sector, with April's trade data showing little rebound after a sharp reversal of export growth in the last few months and few promising industries which can be the engines of growth in the future. This week's retail sales data point to weak 2Q consumption after it being a strong contributor to growth in 1Q and with a weaker-thanexpected 1Q GDP and the impact of the wildfires expected to show up in May's data, we think there are increasing risks of the BoC turning dovish at the July meeting. A further fall in oil prices or risk appetite support our bearish view as well.
AUD: Selling AUD Rallies. Bearish.
We remain bearish AUD and look to sell AUD rallies. The RBA easing soon is a possibility in response to Brexit, adding to the already weak inflation dynamics. Our economists were already expecting another 75bp of rate cuts, given the weak inflation outlook and risks of a 2H slowdown in China. In addition to the high market volatility risks for AUD, local house price growth is a key risk; recent acceleration has given the RBA pause, but we still believe the trend will reverse and see further macro-prudential regulation as possible if it does not.
NZD: Risk-Dependent. Neutral.
New Zealand's latest GDP print has surprised to the upside, driven by strong consumption growth, supporting our view that NZD will continue to be supported by strong migration. However, while NZD will likely be supported in the risk rally, we believe that the RBNZ will continue to face the divergent effects of rising house prices (pushing it to keep rates on hold or raise them) and a too strong exchange rate (forcing further easing). To the extent that NZD rallies too far, we like selling the currency as the central bank appears ready to actPost-Brexit: GBP/USD Towards 1.30, EUR/GBP Towards 0.85
With the UK voting in favour of leaving the European Union, the GBP’s outlook appears to be subject to heightened uncertainty. We stressed previously that in the unexpected case of a Brexit, majors such as GBP/USD should approach levels closer to 1.30 and EUR/GBP around 0.85.
It must be noted that the most recent development is keeping both the UK’s inflation and growth outlook subject to heightened uncertainty. This is, for instance, well reflected in UK credit default swaps hitting yearly highs. At the same time uncertainty remains intact given Cameron’s resignation.
Looking ahead, it cannot be excluded that the BoE will have to act anew in order to prevent conditions from destabilising further.
All of the above suggests that the GBP will remain subject to downside risks.
Given the latest development it appears unlikely that data will have any major data impact. The main focus will be on official speakers.
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Tech Targets: EUR/USD, GBP/USD, AUD/USD, NZD/USD, USD/JPY
EUR/USD: Bearish: Diminished bearish momentum but downside risk is still clearly intact.
The rebound from last Friday’s low of 1.0909 has been more resilient than expected as EUR touched a high of 1.1155 yesterday. However, most indicators are still in bearish territory and the greater risk still lies of the downside. The 1.0909 low is acting as a major support but a break of this level could lead to a rapid drop the mid-March low of 1.0820. Only a move above 1.1210 would indicate that a short-term low is in place.
GBP/USD: Bearish: A move to 1.3000 would not be surprising.
We view the current movement as a short-term consolidation phase that is expected to lead to an attempt lower to take out the post-Brexit low of 1.3120/25 (for a move to the major 1.3000 level). However, it has been a week since Brexit and the lack of follow through has dented the downward momentum somewhat but confirmation of an interim low is only upon a break above 1.3600.
AUD/USD: Neutral: Expect choppy trading between 0.7305/0.7510. [No change in view]
AUD is rebounding quickly from the 0.7325 low seen on Monday. While the up-move appears to have scope to extend higher and test the strong 0.7510 resistance, a clear break above this level is not expected. In other words, we are holding on to our neutral view for now and expect AUD to continue to trade choppily within a 0.7305/0.7510 range.
NZD/USD: Neutral: In a broad 0.6975/0.7170 range. [No change in view]
NZD came close to the major 0.6975 support on Monday (low of 0.6971) but rebounded sharply. The up-move is viewed as part of a broader consolidation and not the start of a sustained rally. That said, a test of the major resistance at 0.7170 would not be surprising. Overall, we continue to hold a neutral view and expect further range trading between 0.6975/0.7170.
USD/JPY: Neutral: In a broad 101.00/105.00 range.
While USD has been edging higher over the last several days, the up-move is lacking in momentum and the movement is viewed as part of a consolidation phase and not the start of a sustained rally. The outlook remains mixed, even from a short-term perspective and market seems undecided about what to do with this pair. Overall, we expect further range trading that is likely contained within a 101.00/105.00 range.
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Setups: EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD, NZD/USD
EUR/USD: Monday’s small topping candle encourages our bearish view. A low close today would point lower in range towards initial targets near 1.0970 and 1.1025 ahead of the 1.0910 lows. Further out, we see room towards 1.0840 and then the 1.0710 area.
USD/JPY: Friday’s bearish engulfing candle was endorsed by yesterday’s low close. We are looking for a move lower towards targets near 101.45. A move below 101.45 opens the 99.00 lows.
GBP/USD: We are bearish against last week’s 1.3535 highs and look for a move through the 1.3120 lows to confirm downside traction. Our targets are towards 1.3015 and then the 1.2750 area.
USD/CHF: We expect dips in range to find support in the 0.9645 area and look for a subsequent move higher towards initial targets near the 0.9955 range highs.
AUD/USD: The break above resistance near 0.7520 warns of further upside squeeze before sellers emerge. We expect the 0.7650 range highs to cap a move lower towards the recent range lows near 0.7285. Beyond there, we are looking for downside towards 0.7145.
NZD/USD: We are bearish and expect the 0.7305 highs to cap upticks. We are looking for a move lower in range towards initial targets near 0.6960 towards the 0.6810 area.
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Major Currencies Forecasts
USD, EUR, JPY, GBP, CHF, AUD, NZD: Weekly Outlook - Morgan Stanley
USD: Lower USD For Now. Bullish.
We expect USD will weaken in coming weeks as low US yields and a better risk environment support carry trades and commodity currencies. The June minutes and Dudley's remarks suggest the Fed is largely okay with current market pricing, keeping US yields low. At the same time, Brexit hasn't been systemic for broader risk markets and as volatility falls, risky assets should remain supported. We likely need a bigger global economic downside surprise, out of China or possibly the Eurozone, to shake the current environment.
EUR: Staying Constructive. Bullish.
Recent concerns about Italy and the wider EMU's banking sector have not changed our bullish view on the EUR. We think the probability of an Italian bank rescue is high, as EU authorities will want to reduce the chances of PM Renzi losing the October referendum to keep the currency union intact. This also supports our stance that the weak balance sheets of EMU's financial institutions will reduce their willingness to invest overseas, resulting in longterm capital exports not being sizeable enough to counteract inflows from the EMU's current account surplus, supporting EUR strength.
JPY: Staying Strong. Bullish.
USDJPY has continued to grind lower and in an environment of a weakening USD, we reaffirm our call that USDJPY will continue to fall. We don't expect FX intervention given political risks, particularly contention by the US that the moves have been "orderly" (implying intervention would not be condoned) so the fundamentals will continue to drive USDJPY. Weakening realized inflation and inflation expectations as well as economy activity indicators are putting pressure on authorities to enact further fiscal and monetary policy measures. However, we continue to believe additional expansion of current tools is unlikely to change the trend in USDJPY, which will be driven lower by real yield differentials, hedging flows and risk appetite.
GBP: All Eyes on BoE. Bearish.
The upcoming BoE rates decision will be key for FX investors. The UK sovereign yield curve is still steep enough for conventional monetary policy tools to reduce nominal and real yields to weaken the GBP, hence further monetary easing hinted by the BoE points to more downside potential. Our economists are expecting the BoE to cut rates by 25bp at the meeting. Given markets are currently pricing only an 18bp cut, GBP could weaken further. Our favored way of expressing this bearish GBP view is through long EURGBP positions.*
CHF: Real Yield Support. Bullish.
We remain bullish on CHF due to support from real yield differentials. With sovereign bond yields falling globally, Switzerland's entire sovereign yield curve (up to 50y maturity) is now in negative territory. In this scenario, the downside beta of nominal yields is reduced. With a depreciating RMB, China is exporting deflationary pressures to the rest of the world. This may cause inflation expectations in Switzerland to decline faster than nominal yields, driving real yields higher in support of CHF.
AUD: Selling Rallies. Neutral.
Coupled with USD depreciation and investors’ continued hunt for yield, AUD may stay relatively well supported in the near term. However, we would use a rally to sell, particularly since recent economic data have consistently missed expectations and inflation has remained subdued, which may prompt the RBA to act. In particular, our economists expect a 25bp rate cut at the August meeting, which the markets are currently underpricing (17bp). Political risks have now reduced for the AUD as a majority coalition government is likely. We promote selling AUD against NZD.
NZD: Supported from consumption and no rate cut. Bullish.
NZDUSD should continue to trade higher in this environment of a weaker USD and potentially no more near-term rate cuts from the RBNZ. Deputy Governor Wheeler reiterated his stance on macro prudential measures, suggesting that investors will likely have tighter rules by the end of the year but not suggesting anything new that would indicate that they could cut rates further. A stable CPI print on 17th July should keep the RBNZ away from near term rate cuts. We continue to expect strong migration to support housing and local consumption. NZDUSD will likely cross the previous high at 0.73 this week.
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USD, EUR, JPY, GBP, CAD, AUD, NZD: Weekly Outlook - Morgan Stanley
USD: Lower USD For Now. Bearish.
We expect USD will weaken in coming weeks as low US yields and a better risk environment support carry trades and commodity currencies. The June minutes and Dudley's remarks suggest the Fed is largely okay with current market pricing, keeping US yields low. At the same time, Brexit hasn't been systemic for broader risk markets and as volatility falls, risky assets should remain supported. We likely need a bigger global economic downside surprise, out of China or possibly the Eurozone, to shake the current environment. NFP last week was strong on the headline but underlying details were weaker, good enough to reduce fears of a recession but not strong enough to bring the Fed back into play. This supports our bearish USD view.
EUR: Focus on ECB. Bullish.
We remain bullish on EUR. This week, the ECB rates decision will be a key risk event. We do not expect EUR to weaken on the back of this, given our economists are not expecting a rate cut which the currency responds most to. Any additional QE measures will be ineffective in weakening the EUR as it does not lower long-term bond yields. Italian bank shares have also recovered as equity markets are pricing in a pragmatic solution for the banks without triggering a full-scale bail-in, but EUR is still trading at a discount when measured using real yield differentials. Therefore, we think there is more upside potential and promote buying against GBP and USD.
JPY: Waiting for BoJ. Neutral.
With FX markets responding to headlines on debt monetisation in Japan, but the authorities not revealing specific details on what measures they will implement, we think JPY will be volatile and will wait for the risk events before selling USDJPY again. We will watch the outcome of the BoJ meeting on 29 July and the announcement of the supplementary budget before re-entering any JPY trades. If the authorities do not implement debt monetisation, then Japanese real yields will continue to rise as current monetary policy tools are no longer effective in boosting inflation expectations, in our view. We will then look to re-enter long JPY positions.
GBP: Fade the Rally. Bearish
GBP rallied after the announcement of the new Cabinet reduced political uncertainty and BoE's inaction surprised markets. However, we would suggest fading any rallies. The markets have been focused on upbeat headlines suggesting resilient retail demand post-Brexit, but we think it is premature to make any judgement from so few data points. GBP also faces the risk of the BoE delivering a bigger-than-expected easing package in August. We think any GBPUSD upside is limited to 1.35, while the downside can reach 1.25 in the coming months. Given this asymmetric risk profile, we remain bearish on GBP and like expressing this via long EURGBP positions.*
CAD: Turning Neutral. Neutral.
We are turning back neutral CAD following the surprisingly hawkish BoC meeting. Despite revising down its growth forecast and pushing back the date of output gap closure, the BoC maintained a neutral tone and showed no willingness to ease anytime soon. Based on rhetoric from the press conference, they appear more worried about housing than their forecasts imply. They also emphasized a willingness to look through short-term disappointment on trade data and remained confident that data would eventually rebound. However, by forecasting a strong rebound in 3Q and 4Q growth, the BoC has set itself a high bar: if growth fails to meet these optimistic expectations, easing may come back on the table. For now, we don't like trading CAD from the short side and believe it can appreciate further from here, though positioning remains very long.
AUD: Bullish For Now. Bullish.
Coupled with USD depreciation and investors’ continued hunt for yield, AUD may stay relatively well supported in the near term. While we believe the RBA will eventually cut rates in August, there is no catalyst until the 2Q CPI report in a few weeks. Until then, we expect AUD to perform well particularly in light of the decent employment report this week. In addition, political risks have now reduced for the AUD as a majority coalition government is likely. Our long-term bearish view, however, remains unchanged. and we expect more rate cuts to push AUD lower over the medium term.
NZD: Supported from consumption and no rate cut. Neutral.
NZDUSD should continue to trade higher in this environment of a weaker USD thought NZD should underperform AUD. The announcement of a economic update, following the upcoming CPI report but ahead of the next RBNZ meeting signals a worry over the level of the exchange rate and increases risks of rate cuts in either outcome. A weaker CPI indicates a need for further monetary easing while a strong CPI could push the exchange rate to even more uncomfortable levels (though not necessarily inducing rate cuts like the former scenario). However, housing remains an issue and deputy Governor Wheeler reiterated his stance on macro prudential measures, suggesting that investors will likely have tighter rules by the end of the year. We continue to expect strong migration to support housing and local consumption.
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Tech Targets: EUR/USD, GBP/USD, AUD/USD, NZD/USD, USD/JPY
EUR/USD: Neutral: In a 1.0995/1.1200 range.
We shifted to a neutral stance last Friday and there is no change to the view. We continue to expect EUR to trade in a 1.0995/1.1200 range for now. Only a clear break out of this range would lead to a sustained directional move.
GBP/USD: Neutral: Recovery could extend higher to 1.3535.
The current outlook is still viewed as neutral even though the odds for the current corrective recovery to extend higher to 1.3535 have diminished. Only sustained move below 1.3150 would indicate that the short-term upward pressure has eased.
AUD/USD: Bullish: To take partial profit at 0.7700.
While the bullish phase that started about 2 weeks ago is still intact, upward momentum is clearly waning and the ‘bearish outside day’ last Friday does not bode well for those who are bullish AUD. However, confirmation of a short-term top is only upon a move below 0.7530 (and the start of a deeper pull-back towards 0.7455). As highlighted in previous updates, those who are long should look to book profit on any approach to 0.7700, ahead of the major 0.7720 level.
NZD/USD: Neutral: Bearish if daily closing below 0.7080.
We shifted to a neutral stance last Friday and expected the pull-back in NZD to extend lower to 0.7080. The weak CPI data early this morning sent NZD tumbling to a low of 0.7068. Downward momentum is picking up rapidly and a closing below 0.7080 by end of today would shift the outlook to bearish (for an immediate target of 0.6975). Overall, this pair is expected to remain under pressure in the next several days unless it move and stay above 0.7155.
USD/JPY: Bullish: To take profit at 106.60.
While the 106.00 target that was first highlighted last Wednesday was exceeded USD dropped sharply after touching a high of 106.30. As mentioned previously, the next resistance above 106.00 is at the 106.80 high seen on the day of Brexit. That said, the pullback has dented the recent impulsive momentum and those who are long should look to book partial profit at 106.60, ahead of the major 106.80 level.
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Tech Targets: EUR/USD, GBP/USD, AUD/USD, NZD/USD, USD/JPY
EUR/USD: Neutral: Bearish if daily closing below 1.1095.
There is no much to add to yesterday’s update. As highlighted, while downward momentum has improved, only a daily closing below 1.1095 would indicate that a move towards 1.0905/10, 1.0820 has started. This scenario still seems likely unless EUR can move back above 1.1120 from here (1.1060 is already a strong short-term resistance).
GBP/USD: Neutral: In a 1.2960/1.3320 range.
Shorter-term volatility appears to have eased off somewhat and from here; we maintain our neutral view on GBP. We continue to expect this pair to trade sideways in the coming days, likely between 1.2960 and 1.3320.
AUD/USD: Neutral: Pull-back has room to extend lower to 0.7445. [No change in view]
We shifted to a neutral stance on Tuesday and expected the current pull-back in AUD to extend lower to 0.7445. The price action is line with our expectation but the down-move has been more rapid than expected and a clear break below 0.7445 would greatly increase the odds for further decline to 0.7400, possibly to 0.7330. Overall, this pair is expected to stay under pressure unless it can reclaim 0.7560. On a shorter-term note, 0.7530 is already a strong resistance.
NZD/USD: Bearish: Next target at 0.6895.
The current movement is viewed as a short-term correction and as long as 0.7080 is intact, the outlook for NZD is still deemed as bearish. However, the 0.6952 low seen yesterday is acting as a solid support but a clear break of this level could lead to a rapid drop the next target at 0.6895.
USD/JPY: Shift from bullish to neutral: In a 104.00/107.00 range.
While the bullish phase that started last week extended to a high of 107.47 yesterday, Kuroda’s comment led to a plunge in USD to a low of 105.41. The breach of the 105.80 stoploss indicates that the bullish phase has ended. The outlook for USD from here is viewed as neutral and the current movement is likely part of a broad consolidation phase. In other words, expect sideway trading from here, likely between 104.00 and 107.00.
Forex - Weekly outlook: July 25 - 29
Monday, July 25
Japan is to release data on the trade balance.
In Europe, the Ifo Institute is to report on German business climate.
Tuesday, July 26
New Zealand is to release data on the trade balance.
The U.S. is to release data on new home sales as well as a private sector report on consumer confidence.
Wednesday, July 27
Australia is to report on consumer price inflation.
The U.K. is to release a first read on second quarter gross domestic product.
The U.S. is to publish a report on durable goods orders and pending home sales.
Later in the session, the Federal Reserve is to announce its benchmark interest rate and publish its rate statement.
Thursday, July 28
In the euro zone, Germany is to report on unemployment change. The country will also produce initial estimates on consumer inflation, while Spain is report on the unemployment rate.
The U.S. is to release weekly data on initial jobless claims.
Friday, July 29
Japan is to release data on household spending, inflation, unemployment, retail sales and industrial production.
Meanwhile, the Bank of Japan is to hold its next monetary policy review. The rate announcement is to be followed by a press conference.
Elsewhere, New Zealand is to publish data on business confidence, while Australia is to report on producer price inflation.
In Europe, Germany is to release data on retail sales, while Spain is to produce initial estimates on consumer price inflation and second quarter economic growth.
The euro area is also set to unveil its preliminary inflation estimate for July as well as flash GDP figures for the second quarter.
The U.K. is to release data on net lending and mortgage approvals.
Canada is to report on monthly GDP growth.
The U.S. is to round up the week with an initial estimate of second quarter economic growth and revised data on Michigan consumer sentiment.