Charles Rubenfeld and Gek Teng Khoo of Morgan Stanley Global FX Strategy
USD: Staying Offered. Bearish.
The cyclical rebound in China's growth has supported global risk appetite, and investors' hunt for yield has brought global risk premia down. In this environment, low US real yield is unattractive and the USD should continue to come under selling pressure. This week, the FOMC meeting will be in focus. Recent mixed US data indicates that there is unlikely to be a material change in the Fed's dovish stance, which means the USD will remain offered for now.
EUR: Range Bound Post ECB. Neutral.
We maintain our view for EUR to be range bound following the recent rather uneventful ECB meeting. The ECB's language on the exchange rate remained relatively benign but we do expect the ECB to push back If EUR appreciates from current levels. Furthermore, while the economy appears to have had a strong 1Q, forward-looking indicators point to a sluggish 2Q while Brexit risks and signs of increasing populism (such as the Dutch referendum result) will also limit the EUR's upside. We remain long-term bears.
JPY: Tactical Weakness. Neutral.
Watch: CPI, Industrial Production, BoJ Rates Decision We think USDJPY could tactically rebound to 112.50, as strong global risk appetite reduces the demand for safe haven assets and pauses JPY-supportive repatriation flows by domestic investors. However, our medium term bullish view on JPY has not changed and we would look to sell at 112.50. This week, CPI numbers and the BoJ meeting will be in focus as markets assess whether the BoJ still has policy tools left to curb the unwanted currency strength.
GBP: Supported by Risk Premium. Neutral.
Approvals The global risk-on sentiment provides the backdrop for a GBP rebound in the short term. In an environment of declining risk premia globally, GBP's high risk premium due to Brexit uncertainty is attractive to investors and should keep the currency supported. The "Remain" camp gaining more votes in recent polls may also ease investors' concerns about Brexit temporarily, but we expect volatility to increase as Brexit campaigns step up.
CHF: EU politics watched. Neutral.
Watch: Sight Deposits, KOF Leading Indicator For now, we expect EURCHF to remain fairly range bound but are waiting for opportunities to sell longer term. In times of global risk-off, the CHF tends to underperform the JPY. However, when it is a European issue, such as the pressure from the rise of populist parties and Brexit worries, the CHF tends to strengthen. The Dutch referendum is another sign that political risks are rising in the Eurozone. We don't think the SNB would outright reverse CHF appreciation through intervention, but they could limit the magnitude.
AUD: Watching CPI. Neutral.
We remain medium-term bears on AUD and but have closed our short AUDUSD position given our view that the commodity and risk rally can continue. Last week's employment data was mixed, with a strong headline but weak full-time/part-time split, though it is likely good enough for the RBA to maintain its neutral bias. We still expect the RBA to ease by 50bps this year as commodity prices fall and data deteriorates and view further appreciation of AUD as increasing the risks these cuts happen earlier than expected.
NZD: Focus on RBNZ. Neutral.
Helped by the global risk-on sentiment, CPI figures coming in line with expectations and a solid rise in dairy prices, NZD has broken the 0.7000 level for the first time since June 2015. However, we are cautious about the currency strength as the NZD TWI currently trades at a 4% premium to the RBNZ's Sep-16 forecast, which is the threshold.