From Global FX Strategy Morgan Stanley, some food for thought for the coming week in the majors
USD: Correction into Year-end. Neutral.
We still expect USD to rally significantly next year but now see a USD correction into year-end as likely. With a rate hike fully priced for December and the Fed saying it will not incorporate expected fiscal policy changes into the outlook until they occur, there is limited room for the Fed to push US bond yields even higher. In addition, we could see additional profit taking on USD longs initiated post-election. Next year, major policy initiatives as a result of the US election are likely to be USD positive, and we now expect the Fed to hike 6 times by YE18. USD strength will be most pronounced against the low yielders like JPY. Improving data in recent weeks supports our call as well.
EUR: ECB Weakens EUR. Bearish.
We expect the EUR to weaken autonomously following the ECB meeting. The ECB has made it clear that they are here to keep monetary accommodation in the market. The decision to extend QE while reducing the size of the program illustrates the ECB's desire to support peripheral bond markets to maintain financial stability. By allowing purchases of bonds in the 2-year sector and below the deposit rate, short-end bond yields should remain low, which will weaken the EUR. We sell EUR against GBP this week.*
JPY: USDJPY Consolidation into Year-end. Neutral.
We think USDJPY can correct lower in the near term as the USD rally temporarily runs out of steam into year-end and US yields consolidate around current levels. In the medium term, reflationary impulses support our structural bullish USDJPY view. Fiscal stimulus-led yield curve steepening and positive risk appetite make long USDJPY one of our favorite trades next year. The BoJ's yield curve management should ensure that global yield curve steepening pushes rate differentials against JPY. We look to buy USDJPY dips near 112.
GBP: Room for Risk Premium Reduction. Bullish.
We stick to the view that GBPUSD could tactically rebound to 1.30/1.31 in the near term as some of the hard Brexit risk premium in GBP has the potential to be priced out. Following news on the UK potentially being able to pay to access the single market, a 'hard Brexit' scenario may become more difficult to achieve with PM May agreeing to publish her negotiation plans and promising that MPs could vote on the final exit deal. The market's short positioning in GBP has also barely changed, suggesting that any GBP rally could be helped by an adjustment of the large short positions. We buy GBP against EUR in our portfolio this week.*
CHF: Not Weakened By SNB. Neutral.
Despite the latest FX reserves number indicating that the SNB intervened in large volumes in November, EURCHF remained unchanged on the month, indicating large CHF buying pressure. The SNB has been concerned about a strong CHF because of local deflation, but Switzerland's CPI has been rising steadily this year and global inflation is also picking up, which could make the SNB more tolerant of CHF strength. We think CHF could have more room for appreciation, particularly if Eurozone political risks come back into focus, and like expressing this view through buying CHF against JPY.*
CAD: Best Performing Commodity Currency. Bullish.
We expect CAD to outperform other commodity currencies and may strengthen in the near-term against USD. CAD is not as vulnerable as MXN to trade protectionism given a prior free trade agreement which would take effect if the US backs out of NAFTA, though this still remains a risk. However, a better US economic outlook (from other policies like fiscal stimulus) should benefit Canada. Data has remained weak with another disappointing trade report this week. However, this week's BoC meeting provided no surprises and while the Bank pointed out uncertainties around the outlook, they reaffirmed their neutral bias and made clear the bar for easing is high. Poloz noted this week that it would take a "significant departure" in the outlook for easing, supporting ourview.
