From Morgan Stanley (via eFX):

‘USD: Using USD Setback to Buy. Bullish.

Watch: Retail Sales, Industrial Production, Beige Book.

The FOMC minutes suggested that USD strength would have a negative impact on exports and inflation, causing broad USD selling. We believe that setbacks provide better entry levels to enter long USD positions. The US is showing signs of growth, relative to Japan and Europe which are slowing down. The fall in bond yields over recent days highlights that capital flows are going to the US and should this continue would keep the USD supported. Watching for data strength this week is key.

EUR: Data Showing Weakness. Bearish.

Watch: ZEW, Industrial Production, Trade, CPI (F).

Data continues to come in weaker from Europe and was highlighted by the fact that German factory orders fell at their fastest rate since 2009. Inflation has hit a cycle low and the ECB has acted via measures that should expand their balance sheet, a negative for the currency. With bond yields continuing to fall, they are becoming less and less attractive for foreign investors, which would reduce flows into the EUR. We target 1.14 by the middle of next year for EURUSD.

JPY: USDJPY Upside Still Limited. Neutral.

Watch: Industrial production.

Our view that USDJPY upside would be limited has played out well, falling from the 110 peak to now in the 107 handle. We expect that a renewed sell off in both the high yielders (AUD and NZD) and the low yielders (EUR and CHF) against the JPY, could limit USDJPY upside. Over the medium term, there are risks to our JPY view. Our economists still expect the BoJ to ease this month. Should that be correct, then the JPY would weaken, however the market has partially priced this in.

GBP: GBP. Weakness Deepening Bearish.

Watch: CPI, PPI, Employment Report.

The market has pushed back the probability of the first rate hike in the UK by a few months over the past two weeks, weighing on GBP. We expect that GBPUSD could come under somewhat more pressure, particularly if the key releases on inflation and employment next week disappoint. While the FOMC minutes were more dovish than the market expected, we note that this will have implications for the BoE, as it is unlikely to hike rates much earlier than its key trading partners.

AUD: Watching Chinese Data. Bearish.

Watch: Consumer Confidence, Consumer Inflation Expectation.

While the FOMC Minutes provided some support for the AUD, we believe that the fundamental story is still weak. There was a sharp decline in the labour market data and last month’s large upside surprise was revised lower. We believe that the use of macro-prudential measures in Australia will keep the RBA more dovish than the market is currently anticipating. Both this and any weakness seen from Chinese data this week would be a negative for the AUD.

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