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MORGAN STANLEY RESEARCH
Global Currency Research Team
For research analysts, please see contact list at the back of this material.
February 26, 2015
Currencies
Global
FX Pulse
The EUR Imitation Game
USD Data-Dependence. The prospect of reduced forward
guidance from the Fed is set to increase the sensitivity of
USD to data surprises. However, overall, the trend of
relative-return expectations will likely remain USDsupportive as the US economy approaches escape
velocity. We maintain our structural bullish USD view.
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Active Orders
Short SGD/INR
Long USD/THB
Long EUR/PLN
Short AUD/USD
Long USD/PEN
Short EUR/INR
Long USD/CAD
Long USD/CHF
Long USD/TRY
Options Trades
Long EUR Put/USD Call
Short EUR Put/USD Call
Entry
46.74
32.78
4.16
0.7735
3.0690
71.05
1.2450
0.9400
2.4600
Entry Date
05-Feb-15
05-Feb-15
Stop
46.70
31.75
4.10
0.8000
3.0600
72.00
1.2250
0.9250
2.4000
Expiry Date
07-May-15
07-May-15
Target
45.00
35.00
4.35
0.6900
3.2600
64.00
1.3000
1.0000
2.6500
Strike
1.1250
1.0850
See page 10 for more details. Changes in stops/targets in bold italics.
Yield Sensitivity. Investment inflows have kept US yields
suppressed until now. Should front-end treasury yields
begin to rise, we see several channels via which FX will be
impacted – initially by reducing hedging activity, followed
by decreasing the relative attractiveness of non-USD
denominated debt. Both are USD supportive.
Reduced USD Hedging. It is not just yield differentials,
but rather the shape of the yield curve that matters for FX,
and hedging activity in particular. Higher front-end US
rates, reducing the incentive to hedge US asset positions,
will drive the USD higher. Such a dynamic is most
pronounced against CHF and JPY, with ZAR, NZD, NOK
and AUD also vulnerable to higher US front-end yields.
Relative Attractiveness. Countries with high foreign
participation in their bond markets could also see their
currencies weaken if higher US yields spur local debt
outflows. This is very significant for EM markets where
40% or more of local debt is in foreign hands. Overall,
within EM, we find that BRL, TRY, ZAR and MXN have
recently exhibited high sensitivity to US yield selloffs.
Within G10, we would add AUD and NZD to the list given
the high foreign participation in their local bond markets
and the extent of their external liability positions.
MS Major Currency Forecasts
EUR/USD
USD/JPY
GBP/USD
USD/CHF
USD/CAD
AUD/USD
NZD/USD
EUR/SEK
EUR/NOK
USD/ZAR
USD/TRY
USD/RUB
EUR/PLN
EUR/HUF
USD/CNY
USD/INR
USD/KRW
USD/SGD
USD/BRL
USD/MXN
1Q15
2Q15
3Q15
4Q15
1.12
118
1.48
0.91
1.27
0.77
0.71
9.50
8.70
11.65
2.36
66.00
4.33
320
6.16
62.5
1190
1.34
2.65
14.7
1.08
120
1.44
0.93
1.30
0.75
0.68
9.60
8.90
11.75
2.42
68.00
4.35
322
6.13
62.5
1210
1.36
2.75
14.9
1.06
124
1.39
0.99
1.33
0.72
0.66
9.70
9.20
12.05
2.47
70.00
4.35
324
6.12
62.3
1230
1.38
2.85
15.0
1.05
127
1.38
1.02
1.35
0.69
0.65
9.50
9.30
12.30
2.52
72.00
4.35
325
6.09
62.5
1230
1.40
2.90
15.1
Note: Forecasts for end-of-period. G10 and EM forecasts updated on January 22,
2015. AUDUSD and NZDUSD updated on Feb 5, 2015.
FX Market Overview
P2
Is EUR the New JPY?
P5
Technical Chart of the Week – EM Currencies
P9
This Week’s Edition
Strategic FX Portfolio Trade Recommendations
P10
G10 & EM Currency Summary
P13
Is EUR the New JPY? While EUR has lost its positive
beta to risk appetite, it has not yet developed a negative
beta to risk akin to the JPY. Thus, the bearish EUR trade
does not require a risk-on environment. At the same time,
increased foreign investor hedging of European equities is
beginning to mirror Japan’s experience. This is limiting
EUR’s ability to gain from equity inflows. As long as
foreign investor hedging of European equities is popular,
we expect EUR rebounds to be shallow and short-lived.
Global Event Risk Calendar
P15
FX Volatility/Carry Grids, Tactical Indicators
P17
MS FX Positioning Tracker
P19
Macro Forecasts
FX Forecasts
P20
P22
For important disclosures, refer to the
Disclosures Section, located at the end of
this report.
MORGAN STANLEY RESEARCH
February 26, 2015
FX Pulse
FX Overview
Hans Redeker, Vandit D. Shah
 The Fed increasingly seems to be headed towards our basecase scenario of delaying liftoff until some certainty is
achieved on inflation reaching the 2% target.
 A patient Fed has us retaining our emphasis on nominal
growth and yield differentials staying supportive of the USD.
 Despite the Fed’s slow approach, risks to US bond yields are
skewed to the upside, we believe.
 Higher US rates reduce the relative attractiveness of nonUSD denominated debt.
 The US is the biggest debtor globally with non-official
holdings of USD-denominated debt often FX-hedged.
 If front-end US yields pick up increasing the cost of USD
hedging, we find CHF, JPY, ZAR, NZD, and NOK as most
exposed.
 EM markets with significant foreign holdings of their local
debt will be vulnerable should US yields break higher.
Mexico, Hungary, and Malaysia fall into this category.
 On examining the past seven UST selloff periods since 2013
and comparing it to the most recent one, we find that BRL,
TRY, ZAR and MXN are the most vulnerable within EM.
expectations have eased by 2bp to 1.57%. The temporary
pause in the USD rally and some stability in commodity prices
have proven enough to push US inflation expectations higher,
while the pause in the EUR decline has caused EMU inflation
expectations to resume the trend lower. A lower EURUSD
could be in the interest of both sides, helping the Fed delay
liftoff and aiding EMU in importing inflation from abroad.
Watch the US Bond Market
So far, US bond yields have stayed low as domestic capital
demand has been outpaced by foreign capital inflows, tipping
the balance between capital demand and supply towards
lower rates. Relative to the strength of US domestic demand,
bond yields have stayed remarkably low (Exhibit 1).
Meanwhile, US labor market conditions have strengthened as
illustrated by the Jolts report, which has rarely shown such a
large gap between job openings and actual hirings. Looking
only at US factors, US bond yields should move higher.
Exhibit 1
US Bond Yield Upside Risks Are Building
 Within G10, countries with large net external liability positions
could be vulnerable. We maintain our bearish AUD stance.
 We stay long USD against PEN, THB, CAD, CHF, AUD and
TRY, in addition to long INR trades against EUR and SGD.
The Fed and the USD
The Fed may use its March meeting to qualify its forward
guidance and increase its flexibility in hiking interest rates.
However, removing “patient” does not necessarily mean the
Fed will actually hike rates early (see US Economics: Yellen's
Semi-Annual Testimony on Tap (20 Feb 2015)). Labor market
slack exists with wages only growing moderately and headline
inflation is yet to have bottomed out. Nonetheless, reduced
Fed guidance suggests more data-dependence and with the
US economy getting closer to escape velocity than any other
DM economy, we expect anticipated relative-return
differentials to stay USD-supportive.
The relative behavior of 5-year inflation expectations over
recent weeks tells it all. While US 5-year inflation expectations
have increased this month by 16bp to 2.27%, EMU inflation
.
Source: Macrobond, Morgan Stanley Research
Exhibit 2
US Economy Now Supported by a Strong Labor
Market
Source: Macrobond, Morgan Stanley Research
2
MORGAN STANLEY RESEARCH
February 26, 2015
FX Pulse
Exhibit 3
Net Inflows into US Treasurys Increasingly Coming
from Asia (12m Sum)
Exhibit 4
FX Sensitivity to Moves in Front-end US Rates
18
16
14
May 2013 - Feb 2015
12
10
8
6
4
2
0
CHF
JPY
ZAR
NZD
NOK
AUD
PLN
SEK
TRY
MXN
HUF
EUR
KRW
BRL
MYR
RUB
GBP
IDR
CAD
THB
INR
PEN
COP
Obviously, the US has benefited from debt-related inflows
which have suppressed bond yields. Exhibit 3 denotes where
these funds are coming from. Asia and China have been the
main sources of capital finding its way into the US debt
securities. It appears that an increase in Asian savings and
related capital outflows helped keep bond yields low.
Interestingly, ahead of ‘taper-tantrum’ in summer 2013,
foreign-debt inflows into the US slowed down resulting in
Treasury yields spiking sharply higher. In response,
unsurprisingly, EM currencies traded lower.
Beta to UST2y
Note: We use daily %changes to calculate these betas. For example, USD/CHF rises by
1.7% with a 10bps rise in UST2y. Source: Bloomberg, Morgan Stanley Research
EM’s Vulnerability
Source: Macrobond, Morgan Stanley Research
Should inflows into US debt markets ease or US capital
demand increase disproportionally due to a rebounding US
economy, US bond yields could rise. An additional factor to
consider is the slope of the US yield curve. In anticipation of
the Fed hiking rates sooner or later, front-end yields have
risen, reducing the profitability of a yield-curve-inspired carry
trade.
When the US yield curve is steep and front end rates are low,
there is a high incentive to FX-hedge this exposure. However,
when US interest rates rise, increasing the cost of currency
hedging, the incentive to FX-hedge the US exposure
decreases. Reducing currency hedges due to higher US frontend rates can move FX markets considerably, we believe.
Looking at the sensitivities of global FX to UST2y since the
Fed came back into play in May 2013, we find that CHF, JPY,
ZAR, NZD, NOK and AUD are most vulnerable (Exhibit 4).
Risks to US yield have shifted to the upside, we think, raising
the issue of FX vulnerabilities (US Interest Rate Strategy
Insight: A Great Opportunity to Add (20 Feb 2015)). For EM,
there are two risks. First, those economies that run significant
international investment deficit positions, resulting from years
of debt-fuelled current account deficits, will likely experience
some pressure as a result of the USD strength that results fro
higher UST yields. Second, economies that have seen a
significant build-up of leverage, both USD and local currency
denominated, will likely come under pressure as global
interest rates start to rise (driven by higher UST yields).
Although USD-denominated debt has reached record highs in
absolute numbers (USD9trn), admittedly USD liabilities are
often either covered by USD-denominated assets or broadly
matched by FX earnings, allowing a higher USD to support
both sides of balance sheets and not critically raise
vulnerabilities (see Asia Insight: How Vulnerable Is Asian
Debt to a Strong USD? (24 Feb 2015)). However, when USD
funding costs move higher, debt maintenance becomes more
of a problem. Initially, this increase in costs may be small,
only kicking in when debt expires, but it progressively
increases over time.
The initial USD-supportive impact of higher USD yields,
therefore, will come via the reduction of FX hedges –
especially of the foreign holding of USD-denominated debt. In
addition, countries with a large proportion of foreign holdings
of their local debt will be vulnerable as a rise in US yields will
make them relatively less attractive, potentially spurring
outflows. Exhibit 5 lists the proportion of foreign holdings in
3
MORGAN STANLEY RESEARCH
February 26, 2015
FX Pulse
Weak Capex Further Negative for AUD
local EM debt markets. DM investments in local currencydenominated debt may flee when US bond yields spike
higher. Using this framework, we find Mexico, Hungary,
Malaysia, Peru, Indonesia and South Africa as most
vulnerable. When EM bonds lose their relative yield
advantage, we may see related currency weakness.
Exhibit 5
Foreign Holdings in Local EM Bond Markets
Country
% Foreign Owned
Local FX Holding
(in Bn)
As of
Czech Republic
Hungary
Israel
Poland
Russia
South Africa
Turkey
Brazil
Colombia
Mexico
Peru
Indonesia
Korea
Malaysia
Thailand
14.5%
50.6%
5.5%
39.8%
24.2%
36.0%
28.6%
18.6%
16.0%
60.2%
44.5%
40.2%
15.1%
46.9%
17.9%
197
5,094
196
877
585
52
407
31.347
1.436
24
500,832
65,926
150
611
Dec-14
Jan-15
Dec-14
Dec-14
Nov-14
Dec-14
Dec-14
Dec-14
Jan-15
Jan-15
Dec-14
Jan-15
Jan-15
Sep-14
Jan-15
Source: National Country Treasuries, Morgan Stanley Research
Finally, we look at the impact on USD/EM from the most
recent UST selloff after the January labour market report,
comparing it to USD/EM returns in the previous seven UST
selloffs since 2013 (Exhibit 6). While sensitivities on the whole
have reduced somewhat, they are still quite high in absolute
terms in important EM markets such as BRL, TRY, and ZAR.
This likely reflects positioning and valuations.
Exhibit 6
EM FX Sensitivity to US Treasury Yields
3
We have maintained a long-standing negative view on AUD
as the combination of a deeper-than-expected terms of trade
shock, rich valuations, a stalling domestic economic transition,
and a dovish central bank put pressure on the currency.
Given its large net external liability position, AUD is also
vulnerable to a spike in UST front-end yields. Indeed, only a
few weeks ago, we reduced our AUD/USD year-end forecast
further to 0.69 as our economists projected two additional rate
cuts from the RBA by May, taking the cash rate to 1.75% (see
FX Pulse: Revising AUD and NZD (Further) Lower (06 Feb
2015)). With this week’s capex data in Australia coming in
much weaker than expected, we reiterate our negative
stance, especially with the non-mining capex outlook coming
in surprisingly soft (see Australia Macro+: Weak non-mining
capex – case for more RBA rate cuts (26 Feb 2015)). The
capex intentions for 2015-16 (first estimate) came in much
lower than expected at A$110bn, pointing to a 16% decline
over FY16 following from on an expected -7% fall in FY15.
While early capex intention estimates need to be treated with
caution, this material weakness challenges the RBA’s forecast
for an eventual recovery in non-mining investment. As such,
while market expectations have reduced for further RBA cuts
since the February meeting (only 10bps priced in for March
and 29bps by May), we see an even-stronger case now for
two 25bps cuts from the RBA by May. This will further
compress the already-historically low spread between AU and
US bond yields, putting further pressure on AUD/USD.
Our Trades
We maintain our strategy of selectively returning to USD longs
and hold our short positions in TRY, THB, and PEN within EM
and CHF, CAD, and AUD within G10. In addition, we continue
to favour long INR positions on a relative-value basis, against
EUR and SGD.
2
1
0
-1
-2
BRL
TRY
ZAR
PEN
MXN
INR
PLN
SGD
IDR
PHP
TWD
Average Sell-off
KRW
THB
CNY
CZK
HUF
CLP
COP
RUB
MYR
-3
Recent Move
Note: The average selloff is average beta to UST during the past seven UST selloff periods
since 2013. Source: Bloomberg, Morgan Stanley Research
4
MORGAN STANLEY RESEARCH
February 26, 2015
FX Pulse
Is EUR the New JPY?
Evan Brown, Calvin Tse, Vandit D. Shah
Exhibit 1
EUR and JPY Betas to S&P500 Returns
 While EUR has lost its positive beta to risk appetite, it has
not yet developed a negative beta to risk like JPY.
 Negative-beta currencies have three characteristics: (1) very
low interest rates, (2) high foreign hedge ratios on domestic
assets, and (3) a net external asset position.
 EUR qualifies for the first two but is still a few years away
from the third. A shock to risk sentiment is not enough to
reverse EUR’s downtrend, in our view.
 Hedging behavior for European equity inflows is beginning to
mirror Japan’s experience. As long as hedging remains
popular, EUR rebounds should be shallow and short-lived.
The Japanification of the Eurozone
Clients often want to discuss whether Europe is going down
the road of Japan in the 1990s. Many feel European policymakers were late in providing sufficient monetary stimulus,
early in tightening fiscal policy and slow in implementing
necessary structural reforms. It remains to be seen whether
the ECB’s easing to date will be enough to arrest deflationary
pressures and help growth back onto a stable footing. But a
crucial question which we can begin testing now is whether
Japan’s and Europe’s respective currencies are developing
similar behavior. JPY has a tradition of behaving counter to
investor risk appetite; it rallies on negative news, both foreign
and domestic, and depreciates when sentiment is positive. In
short, it behaves like a true global funding currency. Is EUR
beginning to exhibit the same characteristics?
We find that while EUR has lost its positive beta to risk
appetite, it has not yet developed the negative relationship
with risk found with JPY. Exhibit 1 shows the updated EUR
and JPY rolling betas to the S&P 500, an external measure of
1
risk appetite for both currencies. Since late 2012, JPY has
had a significant negative relationship with the S&P 500,
meaning JPY tends to sell off when US stocks are rising.
EUR, on the other hand, used to have a positive relationship
with the S&P 500; however, this has deteriorated over the last
year-and-a-half. EUR’s beta to US stocks is now slightly
negative but is not statistically significantly different from zero.
In short, EUR no longer benefits from a risk-on environment,
nor does it dependably sell off in a positive risk-sentiment
environment, as measured by S&P 500 returns.
0.4
EUR/USD
0.3
JPY/USD
0.2
0.1
-0.1
-0.2
-0.3
-0.4
-0.5
-0.6
Dec-11
Oct-12
Jul-13
May-14
Feb-15
Note: Weekly betas are calculated using our FX Drivers model (see FX Pulse: G4: The
Drivers They Are a-Changin’, August 29, 2013). Dotted lines denote statistically insignificant
betas. Source: Bloomberg, Morgan Stanley Research
What about sensitivity to domestic equities? JPY tends to
move inversely with Japanese equities, though the
relationship is not one-way. A weaker JPY supports equities
via a competitiveness boost and higher translated earnings.
But higher Japanese equities also signal greater faith in the
reflationary effort, which lowers real yields and weakens JPY.
Likewise, robust Japanese risk appetite is often associated
with risk-seeking outflows from Japanese investors, which
also means JPY selling.
Is the same true for EUR? A look at 90-day rolling correlations
shows that after months of near-zero correlation between
EUR/USD and Eurostoxx, the relationship has gone negative.
In the lead-up to the ECB’s QE announcement, the correlation
between FX and stocks in Europe was even more negative
than that in Japan (see Exhibit 2). But in recent weeks the
European correlation has begun to reverse back towards
zero. There is little sign of a stable relationship developing as
of yet – but again, we are quite far from the materially positive
relationship that Eurostoxx and EUR/USD used to exhibit.
The bottom line is that EUR is not yet trading with a negative
beta to risk but very much appears to have lost its positive
beta; indeed, correlations are still evolving and we need time
to see where they stabilize. EUR has not achieved full
funding currency status such that ‘risk-off’ would challenge its
bearish trend. What would have to happen for EUR to
behave as such?
1
Weekly betas are calculated using our FX Drivers model. For details, see FX Pulse: G4: The
Drivers They Are a-Changin’, August 29, 2013.
5
MORGAN STANLEY RESEARCH
February 26, 2015
FX Pulse
Exhibit 2
Exhibit 3
EUR and JPY 90-day Rolling Correlations to
Domestic Equity Returns
Core Europe Yields Lower than Japan
Sep-12
Feb-13
Jul-13
EUR/USD
Dec-13
May-14
Sep-14
Feb-15
JPY/USD
Note: Correlations are calculated on daily percent changes. We use Eurostoxx and Topix
returns. Source: Bloomberg, Morgan Stanley Research
How EUR Becomes JPY
EMU Banks Increase Lending to Foreign Entities
Relative to Domestic Ones
%, YoY
Loans ex Europe
Loans Europe
8
6
2) High foreign-hedge ratios on domestic assets, such that
risk-seeking foreign inflows have a smaller impact on the
currency.
0
4
2
-2
-4
-6
3) A large net external asset position, so when risk appetite
sours, local investors repatriate.
On interest rates, the average sovereign 2y yield in the
eurozone has fallen by 40bp over the last year, compared to a
fall of 5bp in Japan, and an increase of 30bp in the US. As a
result, core Europe in the front end now trades at negative
interest rates – at yields even below Japan’s (see Exhibit 3).
Consistently, EUR is becoming more popular as a global
funding currency. As rates have come down and domestic
opportunities appear comparatively less attractive, EMU
banks have increased lending to foreign entities much more
rapidly than at home (see Exhibit 4).
Australia
Exhibit 4
1) Very low interest rates compared to other countries,
increasing the incentive to fund higher-yielding
investments abroad.
Rates and Funding
US
Source: Haver Analytics, Morgan Stanley Research
In our view, currencies like JPY or the pre-floor CHF trade
inversely to risk appetite because they have:
EUR’s history of positive beta performance reflects that it did
not check the boxes above. However, over the last year,
EUR has ticked off both the first and second prerequisites
required for a currency to trade inversely to risk. It has yet to
fulfill the third, which explains why EUR has not developed a
significant negative beta to positive risk appetite for now.
New Zealand
-0.6
May-12
Norway
-0.5
UK
-0.4
Canada
-0.3
Portugal
-0.2
Italy
0.0
-0.1
Spain
0.1
Japan
0.2
France
0.3
Netherlands
0.4
Germany
0.5
2Yr
Sweden
0.6
%
Switzerland
3.5
3
2.5
2
1.5
1
0.5
0
-0.5
-1
0.7
-8
-10
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Source: ECB, Morgan Stanley Research
Meanwhile, non-European companies have increasingly
2
issued debt in EUR. By issuing debt in EUR, foreign
companies are able to either access cheaper funding or
broaden demand for their securities. In environments of low
domestic interest rates and demand for yield by domestic
investors, the cross-currency basis tends to become more
negative. In this regard, the evolution of the EUR FX basis is
similar to the dynamic in Japan (see Exhibit 5), suggesting
that domestic reach for yield and central bank easing policies
are pushing EUR closer to the status of a true funding
currency.
2
See FT: US companies increasingly borrow in euros, December 14, 2014.
6
MORGAN STANLEY RESEARCH
February 26, 2015
FX Pulse
Exhibit 5
FX Basis Suggests EUR Becoming Funder
Cross-Currency Basis 5yr
40
30
20
10
0
-10
-20
-30
-40
-50
-60
-70
26
23
2
strength. Thus, it was unsurprising that FX-hedged positions
in Japanese equities have become so popular among the
international community. This hedging allowed Japanese
equities to rally and JPY to weaken simultaneously. Similarly,
even as European equities are attractive to global investors
today, the support for EUR is limited, given high hedge ratios
that neutralize the FX impact.
Exhibit 7
-10
Large Portion of Japanese Equity Flows FX-Hedged
-31
13000
-42
-65
JPY
USDmn
11000
-57
DKK
CHF
EUR
GBP
CAD
NZD
AUD
Cumulative Flows: Japan Equity ETFs
Abe Wins Election
9000
Source: Bloomberg, Morgan Stanley Research
7000
Foreign Hedging
5000
Another notable trend has been greater FX hedging of EURdenominated investments. Given that FX hedges are typically
done over-the-counter, we gauge this dynamic by examining
the ETF market. Since the ECB implemented a negative
deposit rate, implicitly using EUR as the transmission
mechanism for monetary policy, foreign investors have
significantly increased FX-hedged equity investments relative
to unhedged ones (see Exhibit 6). As long as front-end rates
trade in the red, foreign investors essentially are paid to
remove FX risk from their European investments. And
knowing that the central bank welcomes a significantly weaker
currency to boost competitiveness and increase imported
inflation, we expect this hedging to continue.
FX Unhedged
1000
-1000
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
Dec-14
Source: Bloomberg, Morgan Stanley Research
A key risk to the EUR downtrend is that unhedged flows surge
faster than hedged ones. There are, indeed, early signs of a
pick-up in unhedged ETF flows, but so far hedged flows are
still moving at a faster pace. We will watch the ETF market
carefully to gauge whether EUR can stage a meaningful
counter-trend rally from risk-seeking inflows.
The Net International Investment Position
Exhibit 6
European Equities Are Now Being FX-Hedged
16000
FX Hedged
3000
USDmn
Cumulative Flows: Europe Equity ETFs
14000
12000
FX Hedged
10000
FX Unhedged negative depo
ECB implements
8000
6000
4000
2000
0
-2000
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
While EUR qualifies on low rates and high foreign hedge
ratios, it does not yet meet the third characteristic of a
negative beta currency – a net external asset position.
Investors in most countries have a natural home bias, such
that when risk appetite sours they repatriate. If local investors
hold more assets abroad than foreigners own of their local
markets, periods of risk-aversion cause local currency
strength due to repatriation. It is no coincidence that both
JPY and CHF, two currencies known for their negative beta
behavior, are from countries with large net international asset
positions (see Exhibit 8). This is still the case when FX
reserves, which are less influenced by global risk sentiment,
are removed from the net international investment position.
Source: Bloomberg, Morgan Stanley Research
This trend mirrors Japan’s experience. Core to the launch of
Abenomics in late 2012 was a desire to correct prior JPY
7
MORGAN STANLEY RESEARCH
February 26, 2015
FX Pulse
Exhibit 8
Net International Investment Position to GDP
While EUR may be gradually evolving into a negative-beta
currency like JPY, it is not there yet. The bearish EUR trade
does not require a risk-on environment. While short-term
position adjustments are always a risk, we do not see a shock
to sentiment as powerful enough to reverse the EUR
downtrend. At the same time, increased foreign investor
hedging of European equities is beginning to mirror Japan’s
experience. This is limiting EUR’s ability to gain from equity
inflows. As long as foreign investor hedging of European
equities is popular, we expect EUR rebounds to be shallow
and short-lived.
140%
120%
NIIP
Bottom Line
NIIP ex Reserves
100%
80%
60%
40%
20%
0%
-20%
EMU
Japan
Switzerland
Source: Haver Analytics, Morgan Stanley Research
EMU, on the other hand, still has a net external liability of
€850 billion. This goes a long way towards explaining why
EUR does not dependably behave as a negative beta
currency. But it seems only a matter of time before Europe
meets this final criterion. Remember that the net international
investment position is the stock and current account is the
flow. As Europe’s current account surpluses have mounted,
its net external liability has shrunk. In fact, the net external
liability has declined by €600 billion just in the last year-and-ahalf, reflecting both current account surpluses and FX
valuation adjustments. The IMF forecasts that large eurozone
current account surpluses will continue; these are flows which
by definition will have to be recycled into foreign assets. At the
current pace of flow adjustments, Europe would post a net
external asset position some time in the next few years. When
the cumulative current account surpluses build into a
European net foreign asset position, then repatriation flows
can support EUR in risk-off environments. But this backdrop is
likely several years away.
8
MORGAN STANLEY RESEARCH
February 26, 2015
FX Pulse
Technical Chart of the Week – EM Currencies
Sheena Shah
10-year EURPLN Chart
5.00
4.80
4.60
4.40
4.20
4.00
3.80
3.60
3.40
3.20
3.00
100 05RSI
4.9307
4.4000
06
07
08
09
10
11
12
13
14
15
06
07
08
09
10
11
12
13
14
15
0
05
EURPLN has formed a
contracting triangle from its
peak of 4.9307 in 2009.
Having broken out of the
triangle in December, the
pair failed to make it past
the 4.40 level. We now
expect a break out higher
from the triangle, looking
for an initial move towards
4.40. We would place a
stop at 4.10 since this is a
move much below and out
of the triangle, suggesting
some downside.
Long-term USDZAR Chart
15.0
14.0
13.0
12.0
11.0
10.0
9.0
8.0
7.0
6.0
5.0
100 00RSI 01
13.8401
12.1350
11.8710
10.6905
(61.8% retracement)
5.5950
02
03
04
05
06
07
08
09
10
11
12
13
14
15
02
03
04
05
06
07
08
09
10
11
12
13
14
15
0
00
01
USDZAR briefly created a
new 10-year high of
11.8926. Breaking back
above this level is key for
the long-term uptrend.
USDZAR has continued to
trade within a channel
since 2012, with the lower
end around 11.30. Market
participants are likely to
keep USDZAR above this
channel, but a clear break
below the 11.20 area could
open up some downside
risks for the pair.
Long-term USDBRL Chart
4.00
USDBRL is trading towards
the top end of a trend channel
formed since 2012. Having
broken through the recent
high at 2.7600, technically
there is further upside
potential. After a break of the
psychological level of 3.0000,
the next key level to watch is
the 61.8% retracement of the
bearish move from 2003-11 at
3.0431.
3.9790
3.50
3.0431 (61.8% retracement)
3.00
2.7600
2.50
2.4650 (38.2%R)
2.00
1.50
100 00RSI 01
1.5291
02
03
04
05
06
07
08
09
10
11
12
13
14
15
02
03
04
05
06
07
08
09
10
11
12
13
14
15
0
00
01
For a description of the Elliott Wave Theory see: Trading Technicals – The Elliott Wave Method, January 10, 2014.
Source: Bloomberg, Morgan Stanley Research
9
MORGAN STANLEY RESEARCH
February 26, 2015
FX Pulse
Strategic FX Portfolio Trade Recommendations
Evan Brown, Vandit D. Shah
20-Feb-15
Enter: 0.9400; Target: 1.0000; Stop: 0.9250
Hold:
Long
USD/CHF
Switzerland’s policymakers face an urgent struggle against the rise in
their real exchange rate. Not only do they risk a sharp fall in
competitiveness and exports, but as well a rise in deflationary risks. As
such, we expect Swiss policymakers to try to counter CHF REER
appreciation – which itself is overvalued trading at 2.5 standard
deviations above its historical average. We like selling CHF against
USD as we expect the structural bullish USD trend to continue.
20-Feb-15
Enter: 1.2450; Target: 1.3000; Stop: 1.2250
Hold:
Long
USD/CAD
12-Feb-15
Hold:
Short
AUD/USD
12-Feb-15
Hold:
Short
EUR/INR
23-Feb-15
Enter:
Long
USD/TRY
Switzerland Risks Falling into Deflation
Canada ULC Still Relatively High
With WTI oil remaining below $60, the assumption implied in the BoC’s
economic forecasts, we think there is room for further easing. We
continue to highlight the second round effects of the oil price fall
including an estimated 30% fall in capex, which BoC Senior Deputy
Governor called ‘huge.’ We are also concerned that non-commodity
production and export growth remains tepid. The rise in manufacturing
unit labor costs suggest Canada will gain less from US growth than in
the past. The key risk to our trade is a sustained rebound in oil prices.
Enter: 0.7735; Target 0.6900; Stop: 0.8000
AUD REER Still Overvalued
The negative pass-through to national income, investment and labour
markets from the decline in Australia’s terms-of-trade appears
substantial, with the RBA downgrading 2015 growth and inflation
forecasts. Our economists now expect two more 25bp cuts from the
RBA by May, with the bank looking to ease while relying on
macroprudential policies to contain the housing market. In contrast,
the rates curve is pricing only roughly 29bp of cuts by May. What’s
more, economic data from China continue to print weak.
Enter: 71.05; Target: 64.00; Stop: 72.00
Macro Outlook Improving in India
Improved governance and a renewed push for structural reform, lower
oil prices and a narrowing current account deficit, and credible
monetary policy make us relatively constructive on INR. India is one of
the few places in the world offering an attractive carry-to-vol ratio.
While we will closely watch the upcoming budget outcome, we maintain
our stance on long INR positions being a good way to pick up carry. In
contrast, we stay negative on EUR on yield compression, reserve
diversification and political uncertainty. Increased bank lending and FX
hedging could only lead to further EUR weakness.
Enter: 2.4600; Target: 2.6500; Stop: 2.4000
Past CBT Easing Cycles
Risk surrounding US yields and CBT monetary policy keep us bullish
on USD/TRY. On domestic monetary policy, we think a further easing
of policy will further fuel market concerns on declining real yields
leaving TRY vulnerable to the external environment; while even if the
CBT takes a more prudent course, we think TRY gains would be
limited given ongoing commentary from some public officials on the
need for faster rate cuts. We believe a rise in UST yields will drive
TRY weaker given Turkey’s high external financing needs. For more,
see EM FX Trades: Buy USD/TRY (23 Feb 2015).
10
MORGAN STANLEY RESEARCH
February 26, 2015
FX Pulse
12-Feb-15
Hold:
Long
USD/PEN
Enter: 3.0690; Target: 3.26; Stop: 3.0600
05-Feb-15
Enter: 4.16; Target 4.35; Stop 4.10
Hold:
Long
EUR/PLN
We see good risk/reward in long EUR/PLN positions after its sizable
move lower in recent weeks. Further strengthening of PLN versus
EUR becomes self-defeating since it increases external deflationary
pressures on the economy, and may lead the market to price in an
increased risk of some form of policy response. In addition, long
EUR/PLN positions provide a hedge to any increase in market pricing
of euro area peripheral tail risks and Russia/Ukraine risks – which
may result in a fixed income outflow from the POLGB market. For
more, see FX Pulse: CEE FX: Policy and External Risks Delay
Recovery (13 Feb 2015).
29-Jan-15
Enter: 32.78; Target: 35.00; Stop: 31.75
Hold:
Long
USD/THB
The battle against lowflation fought by global central banks is in full
swing with surprise easing from the MAS, RBI, BI, BCRP, BoC and RBA
in recent weeks, in addition to the ECB’s monetary salvo. With our
ASEAN economics team expecting Thailand to join the easing
bandwagon soon, we think current levels provide good risk-reward to be
long USD/THB. The high THB REER is undermining competitiveness
and stoking disinflationary pressures increasing the need for the BoT to
act. For more, see EM FX Trades: Long USD/THB (29 Jan 2015).
8-Jan-15
Enter: 46.74; Target: 45.00; Stop: 46.70
Hold:
Short
SGD/INR
With the MAS shifting dovishly recently, SGD moved lower in line with
our expectations that Singaporean policymakers would need to act to
counter deflationary risks and unwanted REER appreciation. We
maintain that view and couple our long-standing bearishness on SGD to
our structurally bullish view on INR as a relative value trade within AxJ.
Improved governance and a renewed push for structural reform, lower
oil prices and a narrowing current account deficit, and credible monetary
policy make us relatively constructive on INR.
5-Feb-15
Buying a 3m 1.1250/1.0850 put spread
Hold:
EUR/USD put
spread
Peru REER Elevated; Trade Balance Down
Copper and gold account for the bulk of Peru’s export revenues and
China is the main trading partner. In line with this, PEN is vulnerable to
lower metal prices and weaker demand from China. PEN is also
vulnerable to higher US interest rates, because of high foreign
ownership of local government bonds. Peru’s REER has room to
adjust lower compared to Chile and other currencies in LatAm. The
key risk to this trade is a sharp rebound in commodity prices.
PLN Faces Deflationary Pressures
THB REER Has Appreciated Sharply
Change in C/A Balance Favors India
Greece: Key Maturities in July &August
EURUSD moves over the coming months are likely to be highly driven
by the political uncertainty around Greece and its position in the Euro
area. While we have seen some positive headlines recently, enough
uncertainty lingers. As such, we keep our put spread on to position for
any sharp moves.
Source for all charts: Bloomberg, Haver Analytics, Macrobond, Reuters EcoWin, Morgan Stanley Research
11
MORGAN STANLEY RESEARCH
February 26, 2015
FX Pulse
Strategic FX Portfolio
Nominal
Notional Weight
Trade Recommendation
Entry Date
Entry Level
Current
Stop
Target
Spot P&L
Carry
P&L
Portfolio
Contribution
Active Trades
Short SGD/INR
$10.0mn
9.8%
08-Jan-15
46.74
45.75
46.70
45.00
$257.3k $109.7k
$367.0k
Long USD/THB
$10.0mn
9.8%
29-Jan-15
32.78
32.36
31.75
35.00
-$129.2k -$24.2k
-$153.4k
Long EUR/PLN
$10.0mn
9.8%
05-Feb-15
4.16
4.15
4.10
4.35
-$33.0k -$11.5k
-$44.6k
Short AUD/USD
$10.0mn
9.8%
12-Feb-15
0.7735
0.7824
0.8000
0.6900
Long USD/PEN
$10.0mn
9.8%
12-Feb-15
3.0690
3.0915
3.0600
3.2600
Short EUR/INR
$10.0mn
9.8%
12-Feb-15
71.05
70.12
72.00
64.00
Long USD/CAD
$10.0mn
9.8%
20-Feb-15
1.2450
1.2499
1.2250
Long USD/CHF
$10.0mn
9.8%
20-Feb-15
0.9400
0.9540
0.9250
Long USD/TRY
$10.0mn
9.8%
23-Feb-15
2.4600
2.4993
2.4000
Cash
$11.7mn
Portfolio Mark to Market
-$115.1k
-$7.8k
$72.8k -$20.7k
-$122.9k
$52.1k
$250.6k
$30.0k
$280.7k
1.3000
$39.2k
-$1.1k
$38.1k
1.0000
$146.8k
$0.4k
$147.1k
2.6500
$157.2k
-$8.4k
$148.9k
11.4%
$101.9mn
Source: Morgan Stanley Research
Notes: (1) Stops are based on the WMR fixing. (2) The portfolio represents hypothetical, not actual, investments. For more details regarding calculations, please see “Reading FX Tactical Trade
Performance” at the back of FX Pulse. Our FX Trade Data Performance Package (12 Feb 2015) contains complete performance statistics. (3) Reported returns are unleveraged. Reported returns do
not take into account transaction fees and other costs; past performance is no guarantee of future results. (4) In the case that trade allocations are increased, entry levels are a weighted average.
* Global Risk Demand Index – US Pat. No. 7,617,143. We updated our methodology for our portfolio in 2011 (FX Pulse: Watching Europe, October 13, 2011).
Simulated Managed Account Monthly Gross Performance - %
Year
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Year return
2007
-0.75
-0.77
-1.08
0.94
0.36
-2.02
1.07
2.75
1.26
0.45
1.16
0.18
3.52%
2008
1.07
2.25
2.72
-1.41
-0.53
1.28
-0.17
-0.24
-0.86
3.12
0.62
0.87
8.96%
2009
0.74
-0.97
-0.15
-1.09
0.50
-0.87
0.30
0.22
2.00
0.77
1.27
0.55
3.27%
2010
-0.01
-0.27
1.71
1.13
1.39
-0.86
-2.36
0.95
0.67
-0.30
0.13
0.66
2.80%
2011
-1.20
0.29
-1.71
0.51
-1.11
-0.33
0.84
-1.02
0.50
-1.03
-0.18
0.44
-3.97%
2012
0.34
0.46
-0.42
0.52
1.78
-0.43
0.39
0.56
0.43
0.53
0.96
0.47
5.72%
2013
-0.23
-0.66
0.08
0.10
0.26
0.05
-0.71
-0.13
-0.62
0.23
1.17
-0.27
-0.75%
2014
1.09
-0.67
-0.54
-0.02
-0.20
-0.26
1.20
0.30
1.23
0.35
-0.30
0.37
2.54%
2015
2.21
0.09
2.30%
Source: Morgan Stanley Research; see notes above
Options Trades
Trade Recommendation
Notional
Entry Date
Expiry Date
Strike
Entry Spot
Entry Vol
Entry Cost
Current Spot
Closed Option Trades
Long EUR put/USD call
Short EUR put/USD call
Current Vol Current Cost
Total 2015 P&L
$10.0mn
$10.0mn
5-Feb-15
5-Feb-15
7-May-15
7-May-15
1.1250
1.0850
1.1470
1.1470
12.23%
12.98%
1.56%
0.70%
1.1254
1.1254
8.58%
10.30%
1.60%
0.56%
P&L
$17.5k
$3.8k
$13.8k
12
MORGAN STANLEY RESEARCH
February 26, 2015
FX Pulse
Click here for interactive currency
pages:
G10 Currency Summary
Dara Blume and Sheena Shah
USD
Re-Loading Longs
6.7%
We remain bullish on USD and are slowly re-adding to our long positions. Chair Yellen’s recent comments suggest ‘patient’
could be removed from the statement in March, but we do not take this as a sign that the central bank will hike in June.
However, tighter monetary policy has never been the key driver for our bullish USD call. Instead, we believe that growth
differentials and investment opportunities in the US economy should boost the dollar.
EUR
Focus Back on ECB
-8.6%
Greece risks seem to have tempered somewhat with an agreement in the works to extend funding for several months. This
should put the focus squarely back on the ECB with central bank purchases set to begin in March and the ECB meeting next
week. We have seen initial signs that the easing seen thus far has translated into green shoots of growth, but are cautious that
this is unlikely to support the EUR given monetary policy differentials and strong US growth.
JPY
A Brighter Picture
0.3%
Japanese economic data has shown fledgling signs of strength, and we will be watching upcoming economic data to see if this
continues. Stronger data is likely to keep the BoJ on hold, even if energy prices are low. Indeed, the BoJ has indicated it will
look through low inflation if this is driven by energy prices. With the central bank on hold and comments from Kuroda
suggesting there could even be downside risks to the 2% inflation target, we believe JPY could gain on the crosses.
GBP
GBP – Support from Gilt Inflows
- 1.6%
Over the coming week GBP may continue to receive some support driven by relative rate differentials say with Sweden or the
Euro area, bringing GBP strength on the crosses. In addition, gilt inflows from regions that are experiencing low bond yield
levels could provide support for GBP. Against the USD we become more cautious over the medium term given growing political
risks that could reduce FDI inflows. We like selling EURGBP and buying GBPSEK and will watch Services PMI this week.
CHF
CPI in Focus
- 2.8%
We remain bearish on the CHF and data out this week may support this view. CPI is due on Tuesday will cover a period
post the removal of the EURCHF floor. Supermarkets in Switzerland have been reporting dropping prices of imported
goods by as much as 20%. If CPI is weak then this could increase market expectations for further monetary
accommodation at the SNB’s March meeting. FX reserves will give an indication of SNB intervention in Feb.
CAD
Better Levels to Buy USDCAD
Bearish
Watch: GDP, BoC Rates Decision
The BoC’s Poloz’s speech caused rate cut expectations to be priced out of the upcoming meeting. We like to use the dip
to buy USDCAD since the BoC is likely to keep its dovish tone and with oil markets remaining volatile, the CAD will
remain weak. Even if oil prices stabilize, the low prices still pose risks to Canadian growth, and the currency may continue
to weaken. The BoC will be the main risk event this week.
Bearish
Watch: Current Account, RBA Decision, GDP, Retail Sales, Trade
9.8%
AUD
Bullish
Bearish
Neutral
Neutral
Bearish
Watch: GDP, PCE, ISM, ADP, Employment Report
Watch: M3, Consumer Confidence, PMI, CPI,ECB, GDP
Watch: Jobless Rate, CPI, IP, Retail Sales, PMI,
Watch: Mortgage Approvals, Services PMI, BoE Rates Decision
Watch: Sight Deposits, KOF, GDP, SNB FX Reserves, CPI
- 7.8%
We believe AUD could unwind some of its recent gains over coming weeks. The latest capex data were weaker than the
already downbeat market expectations. While the RBA may not cut at the coming meeting, with growth soft and
investment in the commodity sector likely to decline, we expect that this would be a delay in further easing rather than an
end of the easing cycle. We remain bearish on AUD.
NZD
Falling Inflation Expectations
- 4.0%
We stick to our bearish NZD view, as the central bank has consistently spoken out against currency strength. The rates
market is pricing in some chance of a cut, but this has not yet been reflected in the FX. Indeed, the latest inflation
expectation data showed a drop to the lowest level in over ten years, suggesting that the central bank will need to keep a
dovish bias.
SEK
Strength Limited by Riksbank
12.5%
The Riksbank’s Per Jansson was recently quoted as saying that any sharp gains in SEK would mean “game over”,
meaning that it would be difficult to get the economy out of deflation. We would expect any sharp appreciation of SEK
(say if EUR begins its next leg lower) to trigger some vocal responses from the central bank showing its readiness to act,
hoping that this signaling limits SEK appreciation. We like buying GBPSEK and also USDSEK.
Still Oil Dependent
Bearish
Watch: Retail sales, Norges Bank Daily NOK purchases
NOK
7.1%
Bearish
Bearish
Watch: M3, Terms of Trade
Watch: GDP, Retail Sales, Industrial Production
EURNOK has come down from its highs of 9.89 in December, tracking the price of oil. While we remain bearish over the longer
term, there are risks that our bearish view may not play out over the coming weeks and the 8.50 level remains key. A move
below here could open the way to further downside, but for the moment staying above here could keep EURNOK rangebound.
We watch the Norges Bank’s daily purchase of NOK; an increase would suggest that the economic outlook is weak.
Charts show 3M performance against USD, as normally quoted and DXY for USD. Click on any currency for a reference webpage on Matrix.
Charts show 1M performance against USD, as normally quoted
13
MORGAN STANLEY RESEARCH
February 26, 2015
FX Pulse
EM Currency Summary
Jessica Liang (AXJ), Meena Bassily (CEEMEA), Felipe Hernandez (LatAm)
CNY
Neutral
INR
Neutral
IDR
Neutral
0.2%
Despite the domestic growth slowdown, our expectation is for the PBoC to manage excess volatility in RMB.
Looking ahead, we anticipate a stable path for CNY.
0.6%
In the near term, we expect INR to be range-bound. Lower oil prices will benefit India both from a current account
perspective and by allowing RBI to lower rates earlier. Longer-term prospects for INR will hinge more on the
success of reform efforts, in our view. Being long INR on the crosses can be attractive from a carry perspective.
Positive political developments, including the 2015 budget revisions, subsidy reforms, and support for direct local
elections, show that the Jokowi government is gaining support within parliament. That said, IDR remains
vulnerable to risk sentiment, amidst the current account deficit and falling commodity prices.
2.9%
1.6%
KRW Bearish
- 0.4%
MYR Bearish
0.0%
PHP
Neutral
THB
Bearish
CZK
Neutral
HUF
Bearish
ILS
Bearish
PLN
Bearish
RUB
Neutral
TRY
Bearish
ZAR
Bearish
BRL
Neutral
CLP
Neutral
COP
Bearish
- 0.4%
0.2%
- 1.4%
0.1%
- 0.7%
- 9.7%
5.4%
- 0.9%
12.1%
- 0.8%
4.6%
2.3%
MXN Bullish
2.3%
PEN
Bearish
We expect USD/KRW to head higher over the medium term. The Bank of Korea remains reluctant to ease rates,
but we think they will eventually act and undertake measures to try weaken the currency to raise competitiveness.
We see MYR as susceptible to continued low commodity prices and see the potential for portfolio investment
outflows in the event of carry trade unwinds. That said, with oil prices stabilizing somewhat we could see a
tactical correction in USDMYR.
The Philippines’ strong fundamentals support the peso even as the central bank turns more neutral. We see
USD/PHP trading with the stronger USD trend but think it is likely to be a relative outperformer in the region.
Although THB has remained relatively stable, we now expect USD/THB to head higher as the impetus on Asian
central banks to cut rates rises due to increasing disinflationary pressures and unwanted REER appreciation.
With our economist now expecting the BoT to cut rates, we are bearish on THB.
President Zeman said the next CNB Board appointments would oppose the devaluation of CZK and be
supportive of EUR adoption. Singer and Janacek’s terms are set to expire in July 2016; this could increase market
speculation that current CNB guidance of using the CZK as a policy tool to end-2016 may not be achieved.
Headline inflation has fallen to new lows at -1.4%Y and we now look for the NBH to re-start an easing cycle which
will consist of 60bp worth of cuts. A new easing bias, along with still significant external risks related to Greece
and Ukraine, should provide EUR/HUF support. However, we are mindful of Hungary’s strong external position.
The BoI has reduced the policy rate to 0.10% and indicated that it is possible rates become negative. They have
placed large emphasis on ILS strength as a reason to cut, and we therefore keep to forecasting a move in
USD/ILS back above 4.00, but think interventions will be needed for upward momentum in the cross to increase.
EUR/PLN had continued to head lower on the back of early signs of improvement in growth and on-hold monetary
policy, while Ukraine risks have reduced. However we think the NBP will deliver a 50bp cut next week which
should help stem recent PLN strength. As such we keep to recommending long EUR/PLN positions.
The recent increase in oil prices in addition to the Minsk agreement have allowed for a recovery in RUB. However,
with the cease fire remaining fragile and risks of more dovish CBR actions we do not think RUB valuations are
attractive, and keep to a neutral stance on the currency.
We entered a long USD/TRY position at the start of the week as we see asymmetric risks for the TRY
surrounding monetary policy and external funding costs. Any further CBT easing and political noise surrounding
the appropriate policy rate should result in more TRY weakness, in addition to any rise in UST yields.
ZAR volatility has become increasingly correlated to UST yields with concerns building around future Fed hikes,
which may result in SAGB volatility and therefore ZAR weakness. In addition, further weakness in gold prices
relative to oil suggests further terms of trade weakness for ZAR.
BRL could see some further weakness given rising political concerns and risks to the fiscal position. Over the
medium term, we would expect BRL to depreciate further in light of poor valuations and competitiveness. That
said, a lot of negative news is already in the price, and with a high cost of carry, BRL may not continue to weaken
at the same pace seen since the start of the year.
CLP could be a relative outperformer within LatAm. It is one of the few places in Latin America where the
depreciation seen thus far has translated into an improvement in exports, which should support growth. We’ve
already seen signs that the economic cycle is bottoming, and with copper prices rising, CLP has room to
strengthen against other Latin American currencies.
USDCOP has broken out of its recent range and could now accelerate towards our year end target. With oil
prices at current levels, this will pressure external and fiscal accounts, as well as reduce investment opportunities
in Colombia. Though COP has already moved a lot, we see scope for further weakness.
MXN should remain a relative outperformer within EM, though it could struggle to strengthen against USD in an
environment of broad dollar strength. Mexico has hedged its exposure to oil prices, limiting its fiscal exposure to
falling oil prices. There are still fruitful investment opportunities in Mexican oil as well, which should support MXN.
PEN is likely to be one of the underperformers within Latin America. There is scope for further depreciation as the
REER remains elevated and the trade balance has moved into negative territory. Central bank intervention could
limit the pace of depreciation, but not the direction, in our view.
Charts show 1M performance against USD, as normally quoted
14
MORGAN STANLEY RESEARCH
February 26, 2015
FX Pulse
Global Event Risk Calendar
Charles Rubenfeld
Date
Day
27-Feb
Fri
28-Feb
Sat
1-Mar
Sun
2-Mar
Mon
3-Mar
4-Mar
5-Mar
Time
(Ldn)
Ccy
Event
Ref.
Period
00:30
13:00
00:05
09:30
09:00
09:00
08:30
08:30
08:30
13:30
14:45
15:00
15:00
AUD
EUR
GBP
GBP
NOK
NOK
SEK
SEK
SEK
USD
USD
USD
USD
Private Sector Credit (MoM)
German CPI (YoY)
GfK Consumer Confidence
GDP (QoQ)
Retail Sales (MoM)
Unemployment Rate
GDP (QoQ)
PPI (YoY)
Retail Sales (MoM)
GDP (QoQ)
Chicago PMI
Pending Home Sales (MoM)
Univ. of Michigan Confidence
N/A
EUR
Deadline for National Parliament Approval of Greek Plan
01:00
CNY
Manufacturing PMI
Feb
05:30
22:30
14:30
08:00
08:30
01:45
09:00
10:00
09:30
09:30
08:00
07:30
13:30
13:30
13:30
15:00
15:00
AUD
AUD
CAD
CHF
CHF
CNY
EUR
EUR
GBP
GBP
NOK
SEK
USD
USD
USD
USD
USD
Commodity Index (YoY)
Consumer Confidence
PMI Manufacturing
SNB Sight Deposits
Manufacturing PMI
PMI Manufacturing
PMI Manufacturing
CPI Estimate (YoY)
Mortgage Approvals
PMI Manufacturing
Manufacturing PMI
Manufacturing PMI
Personal Income
Personal Spending
PCE Core (YoY)
Construction Spending (MoM)
ISM Manufacturing
Feb
00:30
00:30
03:30
13:30
13:30
06:45
09:30
01:30
N/A
15:00
AUD
AUD
AUD
CAD
CAD
CHF
GBP
JPY
NZD
USD
Current Account Balance
Building Approvals (MoM)
RBA Rates Decision
GDP (QoQ)
Industrial Product Price (MoM)
GDP (QoQ)
PMI Construction
Labor Cash Earnings (YoY)
Global Dairy Trade Announces Milk Auction Results
IBD/TIPP Economic Optimism
00:30
N/A
15:00
01:45
09:00
10:00
00:01
09:30
N/A
13:15
15:00
AUD
BRL
CAD
CNY
EUR
EUR
GBP
GBP
PLN
USD
USD
GDP (QoQ)
COPOM Rates Decision
BoC Rates Decision
PMI Composite
PMI Services
Retail Sales (MoM)
BRC Shop Price Index (YoY)
PMI Services
NBP Rates Decision
ADP Employment Change
ISM Non-Manufacturing Composite
00:30
00:30
15:00
12:45
AUD
AUD
CAD
EUR
Retail Sales (MoM)
Trade Balance
Ivey PMI
ECB Rates Decision
Jan
Feb P
Feb
4Q P
Jan
Feb
4Q
Jan
Jan
4Q S
Feb
Jan
Feb F
MS forecast
-0.2%
1
0.5%
0.5%
2.1%
Market
0.5%
-0.3%
2
0.5%
0%
3%
0.5%
Previous
0.45%
2%
58
2%
94
0.5%
-0.4%
1
0.5%
0.2%
3.1%
0.3%
-0.09%
-0.62%
2.6%
59.4
-3.73%
93.6
49.8
49.8
Feb
-20.4%
110.8
51
Feb
Feb F
Feb F
Feb
Jan
Feb
Feb
Feb
Jan
Jan
Jan
Jan
Feb
48.2
50.1
51.1
-0.6%
60.275
53
51.9
55.1
0.3%
-0.3%
1.3%
0.4%
53.5
0.4%
-0.3%
0.4%
53.5
0.4%
-0.1%
1.2%
0.3%
53.3
Tue
4Q
Jan
4Q
Jan
4Q
Feb
Jan
-12.525B
-3.3%
2.25%
2.847%
-1.6%
0.6%
59.1
1.3%
Mar
47.5
2%
2.25%
Wed
4Q
12.50%
0.75%
12.75%
0.5%
1.50%
1.75%
210k
56.5
Feb
Feb F
Jan
Feb
Feb
Feb
Feb
0.3%
12.25%
0.75%
51
53.9
0.3%
-1.3%
57.2
2%
213.3k
56.7
Thu
Jan
Jan
Feb
0.05%
0.2%
-436m
45.4
0.05%
15
MORGAN STANLEY RESEARCH
February 26, 2015
FX Pulse
5-Mar
6-Mar
8-Mar
9-Mar
10-Mar
11-Mar
12-Mar
13-Mar
17-Mar
18-Mar
19-Mar
19-Mar
29-Apr
12:00
10:00
GBP
MYR
BoE Rates Decision
BNM Rates Decision
14:00
08:30
13:30
15:00
NOK
SEK
USD
USD
Norges Bank's Olsen spks (Oslo)
Industrial Production (MoM)
Initial Jobless Claims
Factory Orders
13:30
13:30
06:25
08:15
10:00
05:00
09:00
13:30
13:30
13:30
CAD
CAD
CHF
CHF
EUR
JPY
NOK
USD
USD
USD
Building Permits (MoM)
Trade Balance
SNB FY Earnings
CPI (YoY)
Eurozone GDP (QoQ)
Leading Index CI
Industrial Production (MoM)
Change in Nonfarm Payrolls
Unemployment Rate
Trade Balance
N/A
N/A
23:50
23:50
CNY
CNY
JPY
JPY
Trade Balance
Exports (YoY)
Trade Balance BoP Basis
GDP (QoQ)
22:30
12:15
08:00
08:15
23:50
N/A
14:00
AUD
CAD
CHF
CHF
JPY
JPY
USD
Consumer Confidence
Housing Starts
SNB Sight Deposits
Retail Sales Real (YoY)
M3 (YoY)
Eco Watchers Survey Outlook
Labor Market Conditions Index
00:30
01:30
23:50
09:00
14:00
14:00
AUD
CNY
JPY
NOK
USD
USD
05:30
09:30
23:50
20:00
07:00
08:30
07:30
00:30
07:00
10:00
09:30
N/A
21:30
23:00
12:30
12:30
0.5%
3%
0.5%
3.25%
0.5%
3.25%
290k
-0.1%
1.74%
283k
-3.4%
Thu
Jan
Jan
Fri
Jan
Jan
7.7%
-0.65B
Feb
4Q P
Jan P
Jan
Feb
Feb
Jan
-0.5%
0.3%
105.6
0.3%
257k
5.7%
-46.6B
250k
5.6%
-38.2b
245k
5.6%
-42.5B
Sun
Feb
Feb
Jan
4Q F
60.03B
-3.3%
¥-395.6B
2.2%
Feb
110.8
187k
Jan
Feb
Feb
Feb
1.9%
2.8%
50
4.9%
NAB Business Confidence
CPI (YoY)
Machine Orders (MoM)
CPI Underlying (YoY)
Wholesale Inventories (MoM)
JOLTs Job Openings
Feb
Feb
Jan
Feb
Jan
Jan
3
0.8%
8.3%
2.4%
0.1%
5.03m
CNY
GBP
JPY
NZD
SEK
SEK
THB
Fixed Assets Ex Rural YTD (YoY)
Industrial Production (MoM)
Tertiary Industry Index (MoM)
RBNZ Rates Decision
TNS Sifo Prospera Swedish inflation expectations
CPI (YoY)
BoT Rates Decision
Feb
Jan
Jan
AUD
EUR
EUR
GBP
KRW
NZD
PEN
USD
USD
Employment Change
German CPI (YoY)
Industrial Production (MoM)
Visible Trade Balance GBP/Mn
BoK Rates Decision
Manufacturing PMI
BCRP Rates Decision
Retail Sales Advance (MoM)
Initial Jobless Claims
Feb
Feb F
Jan
Jan
CAD
JPY
RUB
USD
Employment Change
Industrial Production (MoM)
CBR Rates Decision
Univ. of Michigan Confidence
Feb
Jan F
JPY
USD
CHF
NOK
SEK
BoJ Rates Decision
FOMC Rate Decision
SNB Rates Decision
Norges Bank Rates Decision
Riksbank Rates Decision
Mon
Tue
Wed
3.50%
3.5%
15.7%
-0.2%
-0.3%
3.5%
1.75%
2%
-0.21%
2%
Feb
Thu
-0.3%
1.75%
Feb
Mar
Feb
3.25%
290k
-12.2k
-0.4%
0%
£-10154
2%
50.9
3.25%
-0.8%
283k
Fri
12:30
04:30
10:30
14:00
Upcoming Risk Events
N/A
19:00
09:30
10:00
08:30
2.7%
15%
Mar P
Mar
Mar
Mar
Mar
Apr
94
0.1%
0.25%
-0.75%
0.75%
35.4k
0.8%
15%
93.6
0.1%
0.25%
-0.75%
1.25%
-0.10%
N/A Denotes timing approximate or not confirmed / All times and dates are GMT and correct as of the date of publication / For a full list of economic events see the calendar on the Morgan Stanley
Matrix Platform / Source: Morgan Stanley Research, Bloomberg
16
MORGAN STANLEY RESEARCH
February 26, 2015
FX Pulse
Cross-Currency Carry and Vol Heat Map
Vandit D. Shah
Note: Access is available to the carry metrics on an interactive basis on the Morgan Stanley Matrix Platform. Contact your Morgan Stanley sales
representative if you do not have access. For a user’s guide to this heatmap, see FX Pulse, April 24, 2014, page 22.
17
MORGAN STANLEY RESEARCH
February 26, 2015
FX Pulse
Click here for interactive charts
G10 FX Tactical Indicators
Charles Rubenfeld
Exhibit 1
Exhibit 2
Historical Currency Performance
FXVIX (FX Volatility Index)
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
13.0
12.0
11.0
10.0
9.0
8.0
NZD NOK GBP AUD CAD DXY EUR JPY SEK CHF
Monthly
7.0
6.0
Weekly
5.0
Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14
Source: Bloomberg, Morgan Stanley Research
Source: Bloomberg, Morgan Stanley Research
Exhibit 3
Exhibit 4
Relative Momentum Indicator
MS GRDI – Standardized
10
3
2
5
1
0
0
-1
-5
-2
-3
-10
AUD
NZD
GBP
SEK
CAD
Current
NOK
USD
JPY
EUR
CHF
-4
Last week
-5
Feb-14
Source: Bloomberg, Morgan Stanley Research
Apr-14
Jun-14
Aug-14
Oct-14
Dec-14
Source: Bloomberg, Morgan Stanley Research
Global Risk Demand Index – US Pat. No. 7,617,143
Exhibit 5
Exhibit 6
DXY (Dollar Index)
IMM Positions Summary ($bn)
98
NZD
96
CHF
94
MXN
92
90
CAD
88
GBP
86
AUD
84
JPY
82
EUR
80
78
Jan-14
Mar-14
May-14
Jul-14
Source: Bloomberg, Morgan Stanley Research
Sep-14
Nov-14
Jan-15
-28 -26 -24 -22 -20 -18 -16 -14 -12 -10
-8
-6
-4
-2
Note: Aggregate USD positioning in nominal terms, see appendix for details.
Source: Bloomberg, Morgan Stanley Research
18
MORGAN STANLEY RESEARCH
February 26, 2015
FX Pulse
Click here for a full positioning history
Morgan Stanley FX Positioning Tracker
Calvin Tse, Sheena Shah
Overall Score
This
Week
Component Scores
Last
Week
Short
Neutral
Long
MS
Flow
IMM
TFX
Beta
ETF
-9
8
-10
4
2
4
USD
-5
-10
4
-3
1
-5
EUR
8
10
9
-7
-5
-5
JPY
-8
-3
-7
7
1
-4
GBP
8
-2
3
-8
CHF
3
-6
CAD
AUD
Toshin


USD
0
1
EUR
-3
-4
JPY
1
1
GBP
-3
-3
CHF
0
0
CAD
-1
-1

3
-3
AUD
0
-1
 
9
-6
-3
1
-3
NZD
-3
-3
1
-10
-1
-2
-3
NOK
-6
-6
SEK
-3
-4
-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2
3 4 5 6 7 8
 
 





 
9 10
-1

Since Monday, February 23, positioning in
currencies has shifted. In the majors, the
largest shorts are in EUR, GBP, and NZD.
There are no significant longs in the G10.

USD positioning continued to scale back
intra-week. Global macro hedge funds
reduced longs, and bullish sentiment
moderated.

EUR shorts were further reduced. This
move was driven by hedge fund
positioning primarily.

We will provide a full updated report and
refresh positioning scores for all of our
underlying sub-indicators on Monday.
Sentiment
NZD
-3
-8
NOK
-8
1
SEK
For methodology, see Appendix.
Tactical Rich and Cheap Fair Value Model
AUD
CAD
CHF
EUR
GBP
JPY
NOK
NZD
SEK
Average
Spot Fair Value Z-Score
0.78
0.78
1.26
1.25
1.26
0.50
0.94
0.93
-0.37
1.14
1.36
-4.03
1.54
1.55
-1.53
119.03
120.18
0.36
7.53
6.95
-4.44
0.75
0.70
2.23
8.38
7.62
-5.26
TRAC Trade Exp. App.
Short
-0.25%
Short
-0.28%
Neutral
0.37%
Long
19.16%
Long
0.39%
Short
-0.96%
Long
8.35%
Short
-6.54%
Long
10.10%
3.37%
BRL
CLP
COP
HUF
ILS
IDR
INR
KRW
MYR
MXN
PHP
PLN
RUB
SGD
THB
TRY
ZAR
Average
Spot Fair Value
2.87
2.90
616
630
2,458
2,562
305
308
3.86
3.76
12,825
12,975
62.22
62.29
1,112
1,077
3.65
3.27
15.03
15.03
44.25
43.29
4.17
4.18
62.06
84.60
1.36
1.36
32.57
32.64
2.45
2.45
11.64
10.73
Z-Score
0.44
1.25
1.32
0.66
-2.60
0.76
0.77
-0.72
-2.95
0.00
-2.20
0.31
1.34
-0.14
0.95
-0.01
-3.25
TRAC Trade Exp App
Short
-1.11%
Short
-2.20%
Short
-4.05%
Short
-1.08%
Long
2.71%
Neutral
-1.16%
Short
-0.11%
Neutral
3.23%
Long
11.64%
Neutral
0.00%
Long
2.22%
Neutral
-0.36%
Short -26.64%
Neutral
0.11%
Short
-0.20%
Neutral
0.00%
Long
8.46%
-0.50%
The Morgan Stanley Tactical Rich and Cheap (TRAC) model is designed to signal whether a currency is overvalued or undervalued
over a 2- to 3-month investment horizon, and aims to provide an indication of short-term fair value rather than a determination of
long-term equilibrium fair value. The model is based on an econometric approach using both macroeconomic and market variables,
using an algorithm that identifies the ‘best’ model on the basis of modern statistical considerations and economic theory. In
particular, the algorithm (called L2 Boosting in academic literature) identifies the most important drivers for each currency, while
remaining flexible enough to quickly adapt to new environments and identify ‘false’ market signals.
For statistics on how the TRAC model has performed since introduction in November 2013, see FX Fair Value – Revisiting TRAC
3.0, April 24, 2014. Model updated as of February 23, 2015.
19
MORGAN STANLEY RESEARCH
February 26, 2015
FX Pulse
Central Bank Watch
Next rate
Market
MS
decision
expects (bp)
expects (bp)
US
18 Mar
1
0
Euro Area
05 Mar
-4
Japan
17 Mar
0
UK
05 Mar
-1
Current
Morgan Stanley Forecasts
1Q15
2Q15
3Q15
4Q15
0.125
0.13
0.13
0.13
0.13
0
0.05
0.05
0.05
0.05
0.05
0
0.1
0.10
0.10
0.10
0.10
0.5
0.50
0.50
0.50
0.50
0.75
0.75
0.75
0.75
0
Canada
04 Mar
-8
0
0.75
Switzerland
19 Mar
-16
0
-0.75
0.00
0.00
0.00
0.00
Sweden
29 Apr
-2
0
-0.10
-0.10
-0.10
-0.10
-0.10
Norway
19 Mar
-18
-50
1.25
1.75
1.75
2.00
2.25
Australia
02 Mar
-11
-25
2.25
2.00
1.75
1.75
1.75
New Zealand
11 Mar
-2
0
3.5
3.50
3.50
3.50
3.50
Russia
13 Mar
-
0
15
15.00
15.00
14.50
12.50
Poland
04 Mar
-13
-50
2
1.50
1.25
1.25
1.25
Czech Rep
26 Mar
-1
0
0.05
0.05
0.05
0.05
0.05
Hungary
21 Mar
-12
-10
2.1
2.00
1.70
1.50
1.50
Romania
31 Mar
-
-25
2.25
2.00
1.75
1.75
1.75
Turkey
17 Mar
-
-25
7.50
7.25
6.75
6.75
7.25
Israel
23 Mar
-1
0
0.10
0.10
0.10
0.10
0.10
South Africa
26 Mar
11
0
5.75
5.75
5.75
6.00
6.00
Nigeria
24 Mar
-
0
13
14.00
14.00
14.00
14.00
Ghana
01 Apr
-
0
21
21
21
21
20
China
-
-
-
5.60
5.35
5.10
5.10
5.10
India
07 Apr
-
-25
7.75
7.50
7.00
6.75
6.50
Hong Kong
19 Mar
-
0
0.5
0.50
0.50
0.50
0.50
S. Korea
12 Mar
0
-25
2
1.75
1.75
1.75
1.75
Taiwan
26 Mar
-
0
1.875
1.88
1.88
1.88
1.88
Indonesia
17 Mar
-
0
7.50
7.50
7.25
7.00
6.75
Malaysia
05 Mar
-
-25
3.25
3.00
2.75
2.75
2.75
Thailand
11 Mar
0
-25
2
1.75
1.50
1.50
1.50
Brazil
04 Mar
51
25
12.25
12.50
12.50
12.50
11.50
Mexico
26 Mar
3
0
3
3.00
3.00
3.00
3.50
Chile
19 Mar
-6
0
3
2.75
2.75
2.75
2.75
Peru
12 Mar
-
0
3.25
3.25
3.00
3.00
3.25
Colombia
20 Mar
0
0
4.5
4.50
4.50
4.50
4.50
Source: National Central Banks, Morgan Stanley Research forecasts as of February 25th; Note: Japan policy rate takes a mid-range value. Market expects for G10 as of Feb 26. EM | What’s In the Price.
Green (Red) means MS expects a lower (higher) rate than the market at the next meeting.
G4 Policy Rates
BRICs Policy Rates
US
7
Japan
UK
Euro Area
China
30
Brazil
6
25
5
Russia
India
20
4
15
3
10
2
5
1
0
2002
2004
2006
2008
Source: Morgan Stanley Research, Haver Analytics
2010
2012
2014
0
2002
2004
2006
2008
2010
2012
2014
Source: Morgan Stanley Research, Haver Analytics
20
MORGAN STANLEY RESEARCH
February 26, 2015
FX Pulse
FX Bull/Bear Projections
EURUSD
EUR/USD
1.50
USDJPY
USD/JPY
140
MS Forecast
MS Forecast
130
1.40
120
1.30
110
1.20
100
1.10
90
1.00
0.90
Jun-12
80
Jun-13
Jun-14
Jun-15
70
Jun-12
Jun-15
USD/CAD
1.38
1.33
1.28
1.23
1.18
1.13
1.08
1.03
0.98
0.93
Jun-12
Jun-13
EURCHF
EUR/CHF
1.40
MS Forecast
1.20
1.10
1.00
0.90
Jun-13
Jun-14
Jun-15
Jun-13
Jun-14
Jun-15
AUD/USD
1.09
1.04
0.99
0.94
0.89
0.84
0.79
0.74
0.69
0.64
Jun-12
MS Forecast
MS Forecast
35
1150
34
1.35
1100
33
1.30
1050
Jun-14
Jun-15
MS Forecast
4.25
29
Jun-13
Jun-14
Jun-15
29
13.5
Jun-14
Jun-15
MS Forecast
12.5
11.5
27
10.5
26
3.95
9.5
25
3.85
Jun-13
Jun-14
Jun-15
24
Jun-12
8.5
Jun-13
USDBRL
MS Forecast
2.90
2.70
2.50
2.30
2.10
1.90
Jun-13
Jun-14
Jun-14
Jun-15
7.5
Jun-12
Jun-13
USDMXN
3.10
1.70
Jun-12
Jun-13
USDZAR
USD/ZAR
14.5
28
4.05
USD/BRL
3.30
28
Jun-12
EUR/CZK
30
MS Forecast
4.15
3.75
Jun-12
MS Forecast
EURCZK
4.35
Jun-15
30
EURPLN
EUR/PLN
4.45
Jun-14
31
950
Jun-13
Jun-13
32
1000
900
Jun-12
Jun-15
USDTHB
USD/THB
36
1200
1.25
Jun-14
MS Forecast
USDKRW
USD/KRW
1250
1.40
1.20
Jun-12
Jun-13
AUDUSD
MS Forecast
USDSGD
USD/SGD
1.45
Jun-14
MS Forecast
USDCAD
1.30
0.80
Jun-12
GBPUSD
GBP/USD
1.75
1.70
1.65
1.60
1.55
1.50
1.45
1.40
1.35
1.30
Jun-12
Jun-15
USD/MXN
16.50
16.00
15.50
15.00
14.50
14.00
13.50
13.00
12.50
12.00
11.50
Jun-12
Jun-14
Jun-15
USDCLP
USD/CLP
710
MS Forecast
MS Forecast
660
610
560
510
Jun-13
Jun-14
Jun-15
460
Jun-12
Jun-13
Jun-14
Jun-15
Source for all charts: Morgan Stanley Research, Bloomberg; shaded area is the range of market forecasts.
21
MORGAN STANLEY RESEARCH
February 26, 2015
FX Pulse
Click here for custom cross forecasts
Morgan Stanley Global Currency Forecasts
 We updated most of our G10 and EM forecasts on 22 January, 2015. AUDUSD and NZDUSD were updated on 5 February, 2015.
2015
Current
EUR/USD
USD/JPY
GBP/USD
USD/CHF
USD/SEK
USD/NOK
USD/CAD
AUD/USD
NZD/USD
EUR/JPY
EUR/GBP
EUR/CHF
EUR/SEK
EUR/NOK
USD/CNY
USD/HKD
USD/IDR
USD/INR
USD/KRW
USD/MYR
USD/PHP
USD/SGD
USD/TWD
USD/THB
USD/BRL
USD/MXN
USD/ARS
USD/VEF
USD/CLP
USD/COP
USD/PEN
USD/ZAR
USD/TRY
USD/ILS
USD/RUB
EUR/PLN
EUR/CZK
EUR/HUF
EUR/RON
MS Dollar Index
MS AXJ Index
1.12
119
1.54
0.95
8.38
7.65
1.25
0.78
0.75
134
0.73
1.07
9.39
8.58
6.26
7.76
12831
61.8
1097
3.58
44.1
1.36
31.4
32.4
2.9
14.97
8.7
6.3
619
2488
3.1
11.5
2.50
3.96
60.8
4.19
27.8
314
4.41
94.08
102.88
4Q15 % change to:
2016
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
Consensus
Forward
1.12
118
1.48
0.91
8.48
7.77
1.27
0.77
0.71
132
0.75
1.02
9.50
8.70
6.16
7.80
12600
62.5
1190
3.70
45.5
1.34
32.0
33.4
2.65
14.65
10.63
12.0
640
2450
3.05
11.65
2.36
3.98
66.0
4.33
27.8
320
4.46
94.84
101.23
1.08
120
1.44
0.93
8.89
8.24
1.30
0.75
0.68
130
0.75
1.00
9.60
8.90
6.13
7.80
12800
62.5
1210
3.85
46.0
1.36
32.2
33.8
2.75
14.85
11.25
14.0
650
2500
3.10
11.75
2.42
4.05
68.0
4.35
27.8
322
4.48
97.48
100.36
1.06
124
1.39
0.99
9.15
8.68
1.33
0.72
0.66
131
0.76
1.05
9.70
9.20
6.12
7.80
13000
62.3
1230
3.90
46.5
1.38
32.6
34.2
2.85
15.00
11.88
14.0
655
2550
3.15
12.05
2.47
4.10
70.0
4.35
27.9
324
4.50
100.29
99.58
1.05
127
1.38
1.02
9.05
8.86
1.35
0.69
0.65
133
0.76
1.07
9.50
9.30
6.09
7.80
13200
62.5
1230
3.85
47.0
1.40
32.7
34.5
2.90
15.10
12.50
14.0
660
2600
3.20
12.30
2.52
4.15
72.0
4.35
27.9
325
4.50
101.74
99.30
1.03
126
1.40
1.06
9.13
8.83
1.37
0.68
0.63
130
0.74
1.09
9.40
9.10
6.14
7.80
13000
62.7
1250
3.80
47.3
1.41
32.6
34.7
3.00
15.00
12.50
14.0
670
2650
3.25
12.35
2.54
4.17
72.0
4.34
27.9
325
4.45
102.34
98.89
1.02
125
1.39
1.08
9.12
8.73
1.38
0.67
0.61
128
0.73
1.10
9.30
8.90
6.09
7.80
13000
63.0
1240
3.80
47.5
1.41
32.5
35.0
3.05
14.95
12.50
14.0
680
2700
3.30
12.40
2.56
4.19
70.0
4.28
27.6
320
4.45
102.84
99.14
1.01
123
1.38
1.11
9.11
8.71
1.39
0.65
0.60
124
0.73
1.12
9.20
8.80
6.07
7.80
13000
63.0
1230
3.80
47.7
1.40
32.4
34.5
3.10
14.85
12.50
14.0
685
2750
3.35
12.45
2.58
4.22
70.0
4.24
27.4
315
4.40
103.24
99.45
1.00
125
1.37
1.13
9.00
8.70
1.40
0.65
0.60
125
0.73
1.13
9.00
8.70
6.07
7.80
13000
63.0
1230
3.80
48.0
1.40
32.5
34.5
3.15
14.75
12.50
14.0
690
2800
3.40
12.50
2.60
4.25
70.0
4.18
27.0
310
4.40
104.23
99.40
-4.5
1.6
-8.6
5.1
6.7
12.1
6.3
-8.0
-8.5
-1.6
4.2
1.9
3.3
9.3
-1.3
0.5
1.5
-0.8
8.8
5.8
3.4
0.7
1.2
2.1
-0.7
4.1
7.3
-60.0
5.6
6.1
0.0
2.5
0.8
4.3
8.6
4.8
1.1
5.3
2.3
5.4
-2.1
-6.9
7.1
-10.3
8.3
8.6
15.3
7.7
-10.4
-11.4
-0.2
3.9
0.9
1.1
7.4
-4.1
0.6
-3.4
-3.6
10.8
4.5
5.7
2.8
4.6
4.5
-7.7
-1.2
8.6
122.5
3.9
1.7
-0.5
1.5
-5.7
5.3
4.8
3.4
1.4
6.0
0.5
8.4
-1.5
Source: Morgan Stanley Research
22
MORGAN STANLEY RESEARCH
February 26, 2015
FX Pulse
Appendix
The Strategic FX Portfolio Trade Recommendations page presents the portfolio of tactical trade ideas of the FX Strategy team and the
performance of this portfolio over time.
Strategic FX Portfolio Trade Recommendations (Note: The portfolios represent hypothetical not actual investments.)
 On 10 June, 2010, we implemented changes to our portfolio to make it more robust and to better reflect our confidence levels and
relative risk. A detailed explanation of this change can be found in “Portfolio Methodology Update” (10 June 2010).
 In summary, the trades and the weightings are primarily reviewed weekly on Thursdays and published in the Pulse. However, if we
think there has been a material change to the risk-reward, we will make intraweek changes. We monitor trades daily. We will continue
to publish the portfolio as a list of trades where our strongest conviction ideas will be given the largest weightings. We will, however,
also adjust the weights of trades in order to manage our risk exposure.
 A table showing the trade, trade weight, trade entry date, risk allocation and levels for (average) entry, current, stop and target will be
shown in the Strategic FX Portfolio Trade Recommendations section of the FX Pulse.
 If we increase the weighting allocated to a trade, the entry level published in the table will be changed to reflect a proportionally
weighted rate of the initial entry level and the entry level on the date the weight was increased.
Performance Statistics
 We rebalance our portfolio daily at the NY close to keep the weight of each trade consistent with the published weight.
 We will primarily enter and exit trades using the bid or offer rate of the WMR fixing. If we make an intraday change to our portfolio, we
will cite the closest Bloomberg half hourly fix in our published note and enter/exit at this rate.
 Stops or targets will be triggered if the stated level is met at the WMR fix.
 Returns shown include the cost of carry using the 1W interbank deposit rate if this is quoted liquidly but do not include any other
expenses, slippage or fees and no interest on cash holdings are included. Reported returns are not levered.
 We have re-estimated our returns from 22 June 2006 to 10 June 2010, when we re-launched the portfolio, to take into account our
more robust calculation technique.
 We provide a monthly breakdown of our historical portfolio performance back to Jan 2005 in the Strategic FX Portfolio section of the
Pulse.
The FX Tactical Indicators table highlights the most recently updated indicators we, as a research team, use as inputs to generate both
longer and more tactical forecasts. Matrix charting codes are given in brackets. Change the G10 currency in italics as required.
•Historical Currency Performance: Price changes in currency over the past week and past month. (EURUSD)
•FXVIX (Volatility Index): An index of 3 month implied volatility calculated using 30 G10 and EM crosses (MSFXVIX)
•Relative Momentum Indicator: Measures the momentum of a currency relative to all other currencies; not indicative of historical
performance. (MSRMUS)
•MS GRDI*: An index to assess risk sentiment. It looks at ten different asset classes to gauge risk demand. The GRDI index seen in the
graph is a standardized reading of the index based on the 365-day rolling average. (GRDIIDX)
•G10 Surprise Index: Measures the performance of actual economic data in G10 countries relative to expectations. G10 Average Index
is a simple index; G10 GDP weighted average is based on GDP weights. (MSSIUSD)
•IMM Commitment of Traders Report: The “Aggregate USD Index” is the cumulative aggregate positioning of currencies we track on
the IMM against the USD. We combine IMM positioning on the AUD, CAD, CHF, EUR, GBP, JPY, and MXN to calculate an aggregate
USD index to measure overall net positioning. (MSPIUS)
FX Positioning Tracker Methodology (MSPIUS) See the primer
•MS Flow - Our internal flow data track all spot and forward trades transacted by Morgan Stanley FX globally.
•IMM - We use the US Commodity Futures Trading Commission’s IMM report to track positioning of non-commercial traders.
•Toshin - The Toshin accounts are Japanese foreign currency investment trusts that seek yield abroad. They typically cater to retail investors and
offer a higher return by investing in foreign assets on a currency un-hedged basis.
•TFX - The Tokyo Financial Exchange (TFX) measures Japanese currency trading on margin accounts, and comprises an estimated 10% of the
retail margin market.
•Beta - As an alternative proxy for positioning, our Beta-Tracker measures one-month rolling betas of currency managers’ and global macro
hedge funds’ daily returns on major currency indices.
•Sentiment - The Daily Sentiment Index gathers opinions on all active US futures, eurozone interest rates, and eurozone equities futures markets.
Morgan Stanley Tactical Rich and Cheap Model methodology: See the full report (EURTRAC)
Historic data for all these models can be found on the Morgan Stanley Matrix Platform. See New FX Strategy Interactive Features
(January 17, 2014). Click on the Matrix logo throughout this document or here for a G10 currency reference page:
* US Pat. No. 7,617,143.
23
MORGAN STANLEY RESEARCH
February 26, 2015
FX Pulse
Global FX Strategy Team
Head of Global FX Strategy (London)
Hans Redeker, Managing Director
[email protected]
(44 20) 7425 2430
Co-Head of US FX Strategy (New York)
Co-Head of US FX Strategy (New York)
Currency Strategist (New York)
Currency Strategist (New York)
Evan Brown, CFA, Vice President
Calvin Tse, Vice President
Dara Blume, Associate
Charles Rubenfeld, Analyst
[email protected]
[email protected]
[email protected]
[email protected]
(212) 761 2786
(212) 296 5423
(212) 296 5786
(212) 296 5911
Head of European FX Strategy (London)
Currency Strategist (London)
Currency Strategist (London)
Ian Stannard, Executive Director
Sheena Shah, Analyst
Vandit D. Shah, Analyst
[email protected]
[email protected]
[email protected]
(44 20) 7677 2985
(44 20) 7677 6457
(44 20) 7425 3978
Head of Asia FX and Rates Strategy (Hong Kong)
AXJ FX Strategy (Hong Kong)
Rates/FX Strategist (Hong Kong)
AXJ Strategy (Hong Kong)
Geoffrey Kendrick, Executive Director
Jessica Liang, Vice President
Kewei Yang, Executive Director
Kritika Kashyap, Associate
[email protected]
[email protected]
[email protected]
[email protected]
(852) 2239 7399
(852) 3963 3021
(852) 3963 0562
(852) 2239 7179
LatAm Macro Strategy (New York)
LatAm Local Rates Strategy (New York)
Felipe Hernandez, Vice President
Robert Habib, Associate
[email protected]
[email protected]
(212) 296 4996
(212) 761 1875
Global EM Macro Strategy (London)
CEEMEA Macro Strategy (London)
James Lord, Executive Director
Meena Bassily, Associate
[email protected]
[email protected]
(44 20) 7677 3254
(44 20) 7677 0031
Morgan Stanley entities: London – Morgan Stanley & Co. International plc; New York – Morgan Stanley & Co. LLC; Hong Kong – Morgan Stanley Asia Limited.
24
MORGAN STANLEY RESEARCH
February 26, 2015
FX Pulse
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MORGAN STANLEY RESEARCH
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FX Pulse
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