Market views for 2017 - page 2

 

EUR/USD, USD/JPY: Setups & Targets On L/T Charts


EUR/USD is probing the multi-decade channel support and is now tantalisingly close to the lower bound of the broad consolidation zone at 1.0540/1.0465. The pair has been witnessing a slow drift recently and if the aforementioned support levels give way, EUR/USD will face a further downtrend towards the descending channel limit and projections at 1.0180/1.00.

Ongoing consolidation within wide limits of 1.0540/1.0465 and 1.1360/1.15 resembles the one seen back in 2000/2002 when the pair experienced similar choppy up/down-swings.

So long as 1.0540/1.0465 holds, EUR/USD is likely to undergo a slow recovery towards the median of the range at 1.0860 initially. Once this is surpassed it could challenge the upper bound of the zone.

As was the case in 2000-2002, USD/JPY has indeed experienced a dramatic recovery after testing key graphical levels at 100. The formation of a Bullish Engulfing and Double Bottom project objectives near 116 with the potential to test 119.50.

Despite the accelerated rebound, we view this as corrective as the pair is close to achieving important retracements for a previous downmove in price as well as time terms and a temporary high is likely in 1Q17.

In the event of persistent bullish momentum, the next key hurdle will be at the multi decade descending trend near 123/125.


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Top 10 Exchange Rate Trades For 2017: Morgan Stanley Latest Currency Forecasts


Morgan Stanley released their top FX trades for 2017, going short (forecast to fall) on the EUR/GBP, SGD/INR and AUD/CAD. They are going long (forecast to rise) on the USD/JPY, RUB/ZAR and several others.

Morgan Stanley has released their top 10 foreign exchange trades for 2017.

Covering the US dollar, euro, British pound, japanese yen, Korean won, Russian ruble, Indian rupee, Chinese Yuan, South African rand, Swiss franc and the Norwegian Krone. The ten long-term (2017) forecasts are listed below.

1. Long USD/JPY

Long USDJPY is one of Morgan Stanley’s favorite trades next year.

The yield curve in the US is likely to steepen on expectations of a fiscal stimulus.

On the other hand, Bank of Japan’s yield curve management will push rate differentials against the JPY.

Long unwinding is likely to give a further push to the USD/JPY.

The last 3 months can be seen in the dollar-yen exchange rate chart below:


2. Long USD/KRW

Korea is struggling with anemic growth, debt overhang and manufacturing overcapacity.

The fall in the RUB and the JPY are adding to the deflationary pressures on the Korean Won.

Economists at MS expect the Bank of Korea to cut interest rates three times in 2017.

Hence, diverging growth and monetary policy will increase outflows from Korea.

The last 3 months can be seen in the dollar-won exchange rate chart below:


3. Short EUR/GBP

The GBP might outperform in the near-term forecast with expectations that the UK might be able to negotiate itself access to the single EU market.

The high risk political events affecting the eurozone will also undermine the euro. The Italian referendum is the nearest-term risk, due to take place on 4th December.

The excessively short GBP market will also support the currency, however, the currency will again face headwinds in 2017, hence we suggest a buy against the Euro.

The last 90 day euro to pound sterling exchange rate chart is below for reference:


4. Long USD/NOK

Though oil prices have strengthened in the near-term, the correlation between the USD/NOK and oil prices has reduced.

Uncertainty over 2017 budget and Norway government’s slower fiscal support is likely to weigh on NOK, as a failure to strike a deal will start a complicated process of talks, weakening the NOK in the meanwhile.

The exchange rate history for the US dollar vs the Norwegian Krone is included below:


5. Short AUD/CAD

This is a “relative value play” considering the “monetary policy divergences” between Australia and Canada. Bank of Canada is expected to keep rates unchanged, whereas RBA is expected to cut rates in 2017.

“The market currently prices in a small probability of a rate hike, which we expect to be priced out, weakening the AUD,” the analysts wrote.

6. Short SGD/INR

Singapore is a high export exposure economy, which is likely to face headwinds from a slower trade, declining RMB and JPY, trade protectionism and the economic uncertainty in China.

On the other hand, India’s demonetization drive to fight corruption and blackmoney is positive in the medium-term.

“While there is near-term concern about the impact on corporate earnings and from a steeper US curve, we think a pickup in the balance of payments and the real rate cushion will support INR valuations,” said analysts at Morgan Stanley.

7. Long USD/CNH

Capital outflows are likely to affect China over the medium-term leaving the currency overvalued. A strong dollar will boost the USD/CNH.

8. Long BRL/COP

Though in the near-term, BRL is likely to be affected by external risks and political concerns, in the medium-term, “a positive idiosyncratic story and high volatility adjusted carry should keep the currency supported”.

The latest underperformance is a buying opportunity as the reform momentum and high yields will cushion external risks.

9. Long RUB/ZAR

The OPEC output cut is positive for the RUB and the central bank’s “prudent stance” are likely to keep real rates “fairly attractive”.

Though the ZAR side is also showing signs of improvement with the finance minister remaining in place, with US yields moving higher “ZAR is likely to be affected more than most.”

10. Long CHF/JPY

The Bank of Japan is controlling the yield curve, thereby trimming any rally in the JGB yields.

On the other hand, the SNB is likely to be “more tolerant of the CHF”.

The rising and nominal yield differentials will weaken the JPY, while CHF should act as a good eurozone political risk hedge, hence the pair should rally higher.

 

The Pessimist’s Guide to 2017


This is from Bloomberg, from the people that brought us the 2016 pessimists guide ...

... which warned that Donald Trump and Brexit would shock most of the world in 2016

  • California emerges as the center of opposition to Trump ... "Calexit."
  • China ... devaluing the yuan, canceling orders for Boeing jets and blocking iPhone sales
  • Anti-immigration candidate Marine Le Pen becomes president of France, then holds a referendum on leaving the EU
 

Morgan Stanley make the case for USD/JPY longs into 2017: Rationale, Targets


Our expectation for JPY to weaken broadly and especially versus USD is based on expectations around monetary policy, fiscal policy, the inflation environment and the banking sector. A higher USD/JPY is our highest-conviction trade across the G10 and EM space. We target 125 by 2107-end.

Monetary policy: The BoJ's yield curve control strategy has not only put a cap on the JGB yields below 10y maturity but has also applied a slope. If JGB yields start to rise as a result of rises in global bond yields then the BoJ will buy an unlimited amount of bonds by expanding its balance sheet. In contrast, yields in the US are higher and prone to rising, increasing the yield differential with Japan, supporting USD/JPY. Our economists expect the Fed to hike more than the market expects in 2017, supporting the USD side.

Fiscal policy: Both the US and Japan are expected to expand government spending in 2017, which should support risk appetite and thus could increase Japanese investment abroad. As USD/JPY rises, the incentive to FX-hedge foreign investment reduces, thus adding to upside for this pair. If the Japanese government does choose to increase debt issuance to fund fiscal spending, then the resulting rise in inflation expectations would accelerate the JPY weakness.
Japan's inflation rising faster than nominal yields which are capped by the BoJ should push real yields down. Real yield differentials suggest USD/JPY should currently be trading higher. We expect US nominal yields to rise and real yields to remain fairly muted. Japanese banks seeing a more predictable yield curve may be more incentivized to lend and take on more risk. Lending outside Japan should weaken JPY. Lending inside Japan should raise inflation expectations.

FX hedging: In 1Q16 it was Japanese investors starting to hedge more of their foreign assets that provided JPY strength. As USD/JPY moves higher, we believe that these hedge ratios may change, supporting our trade. The market is still broadly long JPY, which we think needs to shift.

Risks to our view: If global risk appetite turns rapidly weaker due to global growth worries, putting equities under large downward pressure, then Japanese investors may invest less abroad, strengthening JPY. The BoJ cutting interest rates unexpectedly and thus flattening the whole curve again would not.


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Draghi: ECB can buy assets below the deposit rate


Presser from Draghi

  • Will adjust parameters from Jan 2017
  • Can expand or extend QE is needed
  • ECB will act by using all the instruments within mandate
  • QE extension allows for more market presence
  • ECB will closely monitor inflation
  • Sees continued growth in Q4
  • Sees a moderate and firming pace of growth
  • Forecasts are still tilted to the downside
  • Inflation outlook is broadly unchanged

The deposit rate comment is a huge dovish signal. They've removed their boundary.

 

Nomura's 10 'Gray Swan' risks for 2017


Analysts at Nomura list 10 "unlikely but impactful events"

1. Russia on the warpath
2. A surge in U.S. productivity
3. China floats the yuan
4. An exit from Brexit
5. Capital controls in emerging markets
6. Japanese inflation jumps
7. A clearing house crisis
8. Trump takes fight to the Fed
9. Abenomics comes unstuck
10. The end of cash
 

Fitch affirms UK at AA; Outlook negative


Fitch rating comments and projections

  • UK ratings of balance a high income, diversified and advanced economy  against comparatively high public sector indebtedness
  • Projects public debt will likely rise again in 2016 to 42.5% of GDP and peak in 2018 at 43.5% of GDP. This is still below "B" median of 55.8% of GDP
  • Expects UK to invoke article 50  by the end of March 2017. Implying the UK would leave the EU two years later
  • says there is a wide range of possible outcomes concerning negotiations over brags it  in future institutional and trade relationships  between the UK and EU
  • expects general government deficit to be 3.6% of GDP this year
  • says assumes that private-sector investment growth will decline in 2017
  • given this uncertainty UK's ratings are not predicated on any particular base case
  • real GDP rose by 0.7% quarter on quarter in 2Q 2016 and initial estimates point to  0.5% growth in 3Q. 
 

ECB’s Pessimism Game May Unravel Early in 2017


The ECB’s downbeat stance at Thursday’s policy meeting will undermine the Euro in the short term, but pessimism may be increasingly difficult to justify early in 2017, which would increase the risk of a major market reassessment of the outlook and higher yields.

The ECB decision to extend bond purchases for 9 months at a reduced rate of EUR60bn per month, instead of 6 months at the current rate of EUR80bn, did go against consensus expectations, although the more surprising element of the forecasts was the latest staff projections.

The 2017 GDP forecast was revised fractionally higher to 1.7% from 1.6% previously, while the 2018 forecast was unchanged at 1.6%, with the 2019 rate also at 1.6%.

Similarly, the CPI inflation forecast for 2017 was revised only slightly to 1.3% from 1.2% with the 2018 expectation cut to 1.5% from 1.6% with a 2019 forecast rate of 1.7%.

The latest Markit PMI composite index for the Euro-zone recorded an 11-month high of 53.9 with a strong increase in order backlogs. On the inflation front, input prices increased at the strongest rate since May 2015 with increases in the manufacturing sector at the strongest level for close to five years. There was also an increase in average selling prices for the first time in 15 months.

There has been a further recovery in consumer confidence to the highest levels seen since late 2015; and the unemployment rate declined to the lowest level since July 2009, with a rate of 9.8%. Given these metrics and a very accommodative monetary policy, there should be a significant boost to short-term consumer spending trends.


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Reuters poll: Most US primary dealers see no more than 2 Fed rate hikes in 2017


The latest Reuters poll following Wednesday's FOMC rate hike and more hawkish statement/dots

  • Most US primary dealers see no more than two federal reserve rate hikes in 2017
  • Primary dealers see next fed rate hike in 2nd qtr 2017
  • Median view of 18 primary dealers is for year-end 2017 fed funds rate midpoint of 1.13 pct
  • Median view of 16 primary dealers is for year-end 2018 fed funds rate midpoint of 1.76 pct
  • Primary dealers see about 45 pct chance of faster-than-expected pace of rate hikes
  • 12 primary dealers see trump's economic plans boosting or significantly boosting business investment; three see little or no impact
  • Nine primary dealers see trade policy as greatest risk to outlook; five see fiscal policy and two see dollar strength as biggest risks
 

What PIMCO sees in 2017


Some forecasts from the giant bond fund

  • Sees Eurozone growth of 1-1.5%
  • Sees UK growth of 0.75% to 1.50%
  • Sees China growth of 6-6.5%
  • Sees Mexico growth of 1.75% to 2.25%
  • Expects to cautiously buy more emerging market risk
  • Sees Fed managing to raise rates 2-3 times in 2017