Focus of the day:
USD: The End of an Era. Bullish.
We stick to our bullish USD call. Into year end, strength may be focused against lower-yielding currencies such as EUR and GBP, but we believe that USD will emerge to outperform against EM and high beta currencies as well. Commodity prices remain soft, and it will be hard for EM and commodity currencies to rally sustainably in this environment.
EUR: Watching Equities. Neutral.
The EUR is currently driven by the global risk environment. Over the past year, the EUR has been turned into a global funding currency, strengthening when risk sells off. In general, the fall in the oil price and commodities more broadly has put pressure on the credit markets in the US. There appears to be no sign of a turnaround in oil markets, suggesting that EUR downside may be limited. We watch for the point at which Draghi becomes worried about inflation once again for the EUR to turn lower.
JPY: G10 Outperformer. Bullish.
We stick to our bullish JPY view, particularly on the crosses. We do not expect the BoJ to ease further, as the central bank puts the onus on the fiscal side of the equation to boost growth. Furthermore, we are encouraged by the shift in trend in the trade balance, which already bottomed and continues to move higher. Within the G10, the JPY is the most highly correlated with equity markets suggesting that it may continue to benefit should risk stay weak.
CAD: Stick to Bearish View. Bearish.
We remain bearish CAD, though recognize it could see some relief into year end. Despite BoC Governor’s neutral tone in recent comments, we expect the central bank will shift towards a more dovish stance in January, weighing on CAD. What’s more, with oil prices continuing to make new lows, Canada will need to adjust to a new growth model, which could weigh on the currency. (MS maintains a long USD/CAD from around 1.3287, with a revised target at 1.45, and a revised profit-stop at 1.3750).
AUD: A Deteriorating Picture: Bearish.
Iron ore prices continue to weaken but this has so far only had a limited weakening impact on the AUD. We expect the currency to catch up so remain bearish. House prices in the mining communities have started to show weakness and we expect this to spillover to more regions, meaning the RBA can be loose with monetary policy. As global risk stays weak and trade soft we see further downside for the AUD.
NZD: Longer Term Sell. Bearish.
The NZD has been strengthening recently as markets are reducing expectations for further rate cuts next year. In addition, the dairy prices (via futures and auctions) have stabilised somewhat. We believe that the effect is temporary and remain bearish over the longer term. In general, weak global risk appetite should weigh negatively on the NZD too. The RBNZ is concerned about high debt levels in the farming sector, which may be at risk should global funding costs rise.