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MORGAN STANLEY RESEARCH
Global Currency Research Team
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March 5, 2015
Currencies
Global
FX Pulse
USD: Don’t Stop Believing
FX and Reflation. Global disinflation coincided with USD
strength and yet the USD is still performing as reflation
gains traction. The US remains the engine of global
growth and rate differentials continue to move in the
USD’s favor. We expect this trend to continue.
While better European growth data have supported
reflation optimism, European yields remain subdued.
Supply-demand imbalances in European bond markets,
foreign hedging of European equities and increased global
funding in EUR all weigh on the common currency. The
ECB’s willingness to buy bonds with yields well into
negative territory is preventing European bonds from
rallying, leaving the EUR unable to rise even on European
green shoots.
In AXJ, the growth outlook remains subdued. China’s
PBoC has eased monetary conditions, but with the RMB
TWI appreciating, financial conditions have remained tight.
However, for the reflation trade to gain global momentum,
a better economic outlook for China seems a necessary
condition. Hence, we stay bearish on the EM and high
yield sectors, with INR the notable exception.
What We Trade. We close our EUR/PLN long on the
back of the NBP calling an end to the easing cycle and
diminished political risks. We also close our USD/CAD
long as CAD benefits from higher oil prices and the BoC
taking a less dovish stance. We add a EUR/SEK short to
our portfolio as Swedish data improve rapidly. We buy
USD/ILS as recent data show the BoI has backed its
recent rate cut with USD purchases.
This Week’s Edition
We take a deep dive into LatAm FX. We stay FX bearish
on the region, as we believe BRL, COP and PEN will
continue to underperform. CLP and MXN offer value, but
with US bond yields pressing higher, there may be better
entry levels.
We look into foreign JPY-denominated equity portfolios.
Assuming FX hedging ratios remain near 60% of total
exposure, foreign accounts may have to buy USD65bln,
pushing USD/JPY closer to our USD/JPY127 target.
Closed Trades
Long EUR/PLN
Entry
Stop
Closed at 4.15 Mar 4, 2015
Target
Long USD/CAD
Close at NY Close Mar 5, 2015
Active Orders
Entry
Stop
Target
Short SGD/INR
46.74
46.20
45.00
Long USD/THB
32.78
31.75
35.00
Short AUD/USD
0.7735
0.8000
0.6900
Long USD/PEN
3.0690
3.0600
3.2600
Short EUR/INR
71.05
71.00
64.00
Long USD/CHF
0.9400
0.9400
1.0000
Long USD/TRY
2.46
2.50
2.75
Active Orders
Entry
Stop
Target
Sell EUR/SEK
Enter at NY Close Mar 5, 2015
Buy USD/ILS
Enter at NY Close Mar 5, 2015
Buy CLP/COP
Enter at NY Close Mar 5, 2015
Options Trades
Entry Date Expiry Date
Strike
Long EUR Put/USD Call
5-Feb-15
7-May-15
1.1250
Short EUR Put/USD Call
5-Feb-15
7-May-15
1.0850
See page 13 for more details. Changes in stops/targets in bold italics.
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
Latam FX: Not There Yet
P7
JPY: Nikkei Hedge Flows Should
Push USD/JPY Higher
P11
Strategic FX Portfolio Trade Recommendations
P13
G10 & EM Currency Summary
P17
Global Event Risk Calendar
P19
FX Volatility/Carry Grids, Tactical Indicators
P21
MS FX Positioning Tracker
P23
Macro Forecasts
FX Forecasts
P24
P26
For important disclosures, refer to the
Disclosures Section, located at the end of
this report.
MORGAN STANLEY RESEARCH
March 5, 2015
FX Pulse
FX Overview
Calvin Tse, Evan Brown, James Lord, Vandit D. Shah
 EUR’s inability to rally even on better economic news reflects
cross-border hedging of equity investments, increased use of
EUR as a funding currency and supply-demand imbalances
in domestic debt markets.
 The most willing sellers of bonds to the ECB will likely be
foreigners. This dynamic should weigh on EUR even if yields
begin to rise.
Exhibit 1
EUR Equity Inflows Are Currency Hedged
 ECB monetary policy is too easy for a German economy that
is quite strong. Given Sweden’s large export linkages to
Germany, we enter a short EURSEK trade.
16
12
FX Hedged
 Outside of Europe, yields are rising quickly. To the extent
that this reflects global reflation, we urge caution in some
long USD positions.
10
FX Unhedged
 The global race to the bottom is on pause with some central
banks taking a wait-and-see approach. We remove our long
USDCAD and long EURPLN positions.
 We have raised the target on our long USD/TRY trade to
2.75 as we are skeptical the CBT will raise rates to stem FX
weakness.
 We add a long USDILS trade as EUR weakness will require
more policy action to manage ILS TWI lower.
 In Asia, we stay long INR as well as short SGD and THB.
Why Is It Difficult for EUR to Rally?
Over the past couple of weeks, economic data in Europe have
improved noticeably, led by better than expected employment
gains, domestic demand, and inflation in Germany. However,
despite these green shoots, the common currency has
continued to decline towards cycle lows. What is prompting
this disconnect between growth outperformance and currency
returns?
As we’ve been outlining in research over the last year, we
believe that the EUR will continue to decline despite a
moderate growth pickup as it undergoes a structural
transition. Specifically, we highlight two forces that have and
are likely to continue to weigh on the common currency.
First are hedging flows. In this regard, the EUR is now trading
similarly to the JPY post the start of Abenomics (see Is EUR
the New JPY?, February 26, 2015). Though foreigners are
certainly buying European equities in large size amid
improving growth and potential reflation, these inflows are
.
done primarily on a currency-hedged basis, proving the EUR
with limited support (Exhibit 1). We believe that investors are
increasing FX hedge ratios on existing European equity
holdings as well, given that a foreign investor essentially gets
paid to remove FX risk from their European investments. This
flow is likely to weigh on the EUR for some time to come, and
will result in an environment where EUR rallies are shallow.
USDbn
Cumulative Flows: Europe Equity ETFs
14
8
6
4
2
0
-2
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Source: Bloomberg, Morgan Stanley Research
The second force keeping EUR on its downward trajectory is
the increasing use of the common currency as a funder. With
the ECB about to embark on a quantitative easing program in
an environment of negative net European issuance, yields
have compressed markedly. As such, the yield differential
between the EUR and the rest of the G3 has continued to
widen, with EUR rates now even falling below those in Japan
(Exhibit 2).
Exhibit 2
Rate Differentials Increasingly Moving Against EUR
2.3
%
EUR-USD 2Y
EUR-GBP 2Y
EUR-JPY 2Y
1.8
1.3
0.8
0.3
-0.2
-0.7
-1.2
2010
2011
2012
2013
2014
2015
Source: Bloomberg, Morgan Stanley Research
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MORGAN STANLEY RESEARCH
March 5, 2015
FX Pulse
In this environment, investors, corporations, and even
sovereigns are switching away from traditional funding
vehicles, such as USD and JPY, and using the EUR instead.
In the last week an American company issued the largest
EUR-denominated bond offering by a US company on record.
But they are not alone in this regard; foreign companies are
broadly increasing EUR issuance, taking advantage of
extraordinarily low rates, and high demand for yield in Europe
(Exhibit 3).
Exhibit 3
Exhibit 4
European Sovereign Net Issuance Turns Negative
Sovereigns Net Issuance (USD bn)
3,500
2,500
2,000
1,500
1,000
500
Increasing Offshore Issuance in EURs
-
-500
EURbn
430
380
Japan
UK
Europe
US
Total
3,000
-1,000
1980
Cumulative EUR-Denominated
Issuance by US Corporates
1985
1990
1995
2000
2005
2010
2015
Source: Haver Analytics, OECD, DMO, Morgan Stanley Research
Sell EURSEK
330
280
230
180
2009
2010
2011
2012
2013
2014
2015
Source: Bloomberg, Morgan Stanley Research
Finally, our European Economics and Strategy teams have
highlighted that the largest domestic holders of European debt
– the banks and insurers – are unlikely to want to unload their
fixed income securities to the ECB (see Will ECB be able to
achieve its 60bn QE Target?, March 4, 2015). Rather, we
believe that foreign investors are going to be the primary
group of sellers as the ECB begins its purchase program.
This weighs on EUR via a natural flow effect as foreign
investors are displaced from the European bond market while
the ECB pushes down on yields across the curve. The
absorption of such a high share of net European issuance
(Exhibit 4) should lead to further widening of interest rate
differentials between Europe and other major bond markets.
Indeed, ECB President Draghi’s willingness to buy bonds until
reaching the negative deposit rate of -20 bps offers a powerful
signal to the market that European yields will continue to trade
heavy compared to G10 peers. Rate differentials not just at
the front end but across the curve should continue to favor
EUR shorts.
The ECB has committed itself to an aggressive purchase
program that is expected to last until at least September 2016,
operating a monetary policy regime tailored to the union as a
whole. However, depending on individual countries within the
EMU, this policy may actually be un-synchronous with the
state of their respective economic cycles. In particular,
Germany is running an ultra-loose monetary policy stance,
with interest rates across much of the front end in negative
territory, in an environment where economic conditions
remain tight. As Exhibit 5 shows, the German labor market
has recovered markedly since the financial crisis, with the
unemployment rate currently at its lowest level on record.
Exhibit 5
German Labor Markets Tight as QE Starts
13
12
11
German Unmployment Rate
10
9
8
7
6
Source: Bloomberg, Morgan Stanley Research
In such an environment, where monetary policy is kept way
too loose for particular countries, we believe there are
interesting opportunities in the currency markets. The way we
prefer to express this view is by selling EURSEK. Indeed,
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MORGAN STANLEY RESEARCH
March 5, 2015
FX Pulse
given Sweden’s large reliance on exports to the core, we
believe that the country will disproportionately benefit from
ultra-growth supportive policies in Europe. This is already
beginning to show in the data, with recent industrial
production, retail sales, and GDP figures surprising to the
upside in Sweden. Technically, we have also broken below
the 200DMA as well as the bottom of the ascending trend
channel in place since 2013. As such, with both fundamental
and technical factors in place, we have added a short
EURSEK position to our portfolio.
Reflation and FX
Exhibit 7
Inflation Expectations on the Rise
2.8
US 5y5y TIPS Breakeven
2.6
EU 5y5y Inflation Swap
2.4
2.2
2
1.8
1.6
While supply-demand imbalances suppress European yields,
other DM bond markets have been quite lively. US and UK
10-year yields are each up by 40-50 bps in just over a month,
reflecting better employment, improving wage data, and
stabilization in oil prices (Exhibit 6). Even JGB yields have
risen 20 bps from their lows, the largest upward move since
the May 2013 taper tantrum. Market-based measures of
inflation expectations are also finally showing some signs of
life (Exhibit 7). All in, fixed income investors seem to be
looking through low headline CPI prints and anticipating
domestic growth-led reflation.
Consistently, some central banks which eased earlier this
year like the RBA and BoC decided to leave rates unchanged
this week, Even the NBP, which delivered our out-ofconsensus call for 50 bps of cuts, then signaled the end of the
easing cycle. It seems the global race to the bottom has
paused for now with policymakers shifting wait-and-see mode.
This environment warrants caution and more selective
positioning. As such, we have taken off our long USDCAD
and long EUR/PLN trades (Poland Economics and Strategy:
50 and Done?, March 4, 2015).
1.4
May-14
10y Yield Change Since Feb 2
0.60
0.50
Sep-14
Nov-14
Jan-15
Mar-15
Idiosyncratic and External Risks for EM
The majority of our trades in EM are tilted in a bearish
direction. Recent weakness in our EM currency index has
been concentrated in a few specific markets, such as BRL
and TRY. Elsewhere, weakness has been gradual and not
particularly noteworthy. This is particularly the case in Asia,
where price action is relatively benign.
Exhibit 8
USD/EM More Stable in Past Month
130
125
120
115
110
105
100
Jan 14
Exhibit 6
Jul-14
Source: Bloomberg, Morgan Stanley Research
May 14
Sep 14
Jan 15
.USDEM Index
.USDAXJ Index
.USDLATAM Index
.USDEEMEA Index
Source: Bloomberg, Morgan Stanley Research
0.40
0.30
0.20
0.10
0.00
-0.10
GBP USD NOK CAD SWE NZD CHF AUD
Source: Bloomberg, Morgan Stanley Research
JPY EUR- EURAAA ALL
Nevertheless, there are risks in the marketplace that will
prompt weakness across the asset class as a whole should
they materialize. First, focus is high on the path of UST yields
in the US. Tomorrow’s employment report in the US remains
a key risk and another strong report similar to the one we saw
last month would likely further raise expectations of rate hikes
sooner rather than later. As we have discussed on multiple
occasions, rising US bond yields would likely cause disruption
for EM currencies in the majority of markets, including Asia.
Those markets that are both highly leveraged with weak
4
MORGAN STANLEY RESEARCH
March 5, 2015
FX Pulse
fundamentals and depending on foreign capital for growth
would likely be impacted by this dynamic. ZAR, TRY, BRL,
MYR and SGD in particular would be affected, while we would
expect KRW and THB to start weakening too.
Second, what the PBOC does with the CNY is a key risk for
global markets, particularly AXJ currencies. Deflationary
pressure across the AXJ region has increased in response to
the weakness of the EUR and JPY. If we put a CNY
devaluation into the picture, there will be significant pressure
on regional currencies. At this point, however, this remains a
tail risk event.
The bottom line therefore is that although market price action
suggests that EM currency weakness is gradual overall and
more severe in only a few specific cases, there remain global
macro/market factors that could prompt more broad-based
weakness in EM.
Raising USD/TRY Target
Turkey is one of the markets in the EM currency universe that
has been driven by domestic risk factors, as well as ongoing
USD strength. We entered into a long USD/TRY trade last
week at 2.46 (see EM FX Trades: Buy USD/TRY (23 Feb
2015)). We placed an initial target of 2.65. Currently trading at
2.6, we have raised the target to 2.75. This is purely to give us
some additional flexibility around the trade. Indeed, we do not
want to be in a position that we hit 2.65 and are forced to take
the trade out of our portfolio.
Given recent volatility, we are on the lookout for a possible
policy response from the CBT. In past cycles, TRY weakness
was typically brought to an end on the back of a tightening of
monetary policy. We saw this in 2011 and in early 2014. We
suspect the same will be needed on this occasion as well. So
far there has been little indication that the CBT is about to
take this course of action. The CBT has given itself more
flexibility to provide USD liquidity, but we do not believe this
will be particularly effective in providing sustained support to
the TRY. Should the CBT tighten, we would expect some
stability in TRY. A moderation in political noise would help
USD/TRY to stabilise too.
Exhibit 9
Locals Continues To Accumulate USD
200000
180000
160000
140000
120000
100000
80000
60000
40000
20000
0
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
FX Deposits Turkey Banking System
Source: Bloomberg, Morgan Stanley Research
Buying USD/ILS with a target at 4.25 and stop at
3.90
Data released this week shows that the Bank of Israel has
started to intervene more aggressively to manage the ILS TWI
weaker. They purchased a total of USD 800m over February
in addition to USD 245m within the gas programme. This
gives us more confidence in the BoI’s commitment to pursuing
a weaker currency which was communicated in the February
MPC meeting via their 15bp cut and the statement in which
they cited “increased rate of appreciation, and its possible
effects on activity and inflation” as the main reason to reduce
rates.
Should the BoI be successful in steering market expectations
for more ILS weakness, then it is likely that the correlation
between EUR/USD and USD/ILS will reassert itself. This
correlation is based on the premise that the BoI targets the
ILS TWI to which the EUR holds the highest single weighting.
As such, further declines in EUR/USD will require more
significant policy driven moves higher in USD/ILS for the ILS
TWI to not appreciate.
Staying Long INR, Short SGD and THB
Developments over the last few days in Asia have only served
to deepen our conviction in our AxJ trading framework. Over
the last few months, we have been focused on the 3D
problem that most of Asia faces – an odious amalgam of debt,
deflation and weakening demographics (see Asia Pacific
Economics: Are Asian Central Banks Embracing Deflation
Risks? (24 Feb 2015)). Indeed, debt-to-GDP ratios have risen
very sharply in the last decade but economies have
concurrently experienced a decline in credit efficiency, as
buttressed by the material rise in the incremental capital-
5
MORGAN STANLEY RESEARCH
March 5, 2015
FX Pulse
output ratios (ICORs) (Exhibit 10). Due to the overcapacity
and overinvestment, 8 out of 10 economies we cover are in
PPI deflation, with China a glaring example over the previous
35 months. This loss of pricing power for manufacturers and
corporates can become even more difficult to sustain when
real rates start rising – a development that is increasingly
dominating the region and holding back private sector
investment (Exhibit 11).
holding our long USD/THB and short SGD/INR positions, with
our economists still expecting the BoT to cut rates twice this
year and for the MAS to reduce the slope of appreciation
further in its April review (see ASEAN Economics: Will Central
Banks Ease? (27 Jan 2015)). With China further reducing its
growth target to 7.0%y, we continue to see downside risks for
China-exposed and deflationary FX in the region.
Exhibit 12
Exhibit 10
Watching Export Volumes Closely in Asia
Rising ICORs Denote Declining Credit Efficiency
Source: Haver Analytics, Morgan Stanley Research
Source: CEIC, Morgan Stanley Research
Exhibit 11
Higher Real Rates Hurting Asian Economies?
Source: CEIC, Morgan Stanley Research
What’s more, JPY weakness has resulted in sharp unwanted
REER appreciations for several economies – resulting in a
loss of export competitiveness, lower import prices, rise in
disinflationary pressures and higher real rates (Exhibit 12).
While the reluctance of central banks to ease thus far has not
resulted in sharp rises in USD/AxJ yet, we are comfortable
In contrast, we maintain our bullish view on INR, maintaining
long INR RV trades against SGD and EUR. The F2016
budget outcome this past weekend was well-balanced, in our
view, with the government acting well within its fiscal
constraints yet announcing a few good measures to kick-start
public infrastructure spending (see India Economics and
Strategy: Budget F2016 - A Good Balancing Act: Supporting
Growth Vs Fiscal Consolidation (01 Mar 2015)). The efforts to
support a capex recovery alongside a planned reduction in
corporate tax rates to 25% from 30% over the next four years
should further support portfolio inflows, especially on the
equities side, lending INR support. On the monetary side as
well, the inter-meeting 25bp cut enacted by the RBI this week
was very much in line with our economists’ framework of the
Bank targeting real rates of around 175bps resulting in
another 100bps of cuts by year-end (see India Economics:
RBI Policy – 50bps Done, 100bps More to Go (04 Mar 2015)).
This, we think, will support the positive macro story
developing in India via private sector credit expansion leading
to further structural inflows supporting the currency. INR still
provides an attractive carry-vol ratio given its high benchmark
repo rate of 7.50% – as such we maintain our short SGD/INR
and EUR/INR positions.
6
MORGAN STANLEY RESEARCH
March 5, 2015
FX Pulse
Latam FX: Not There Yet
Depreciation has been mainly driven by 1) lower commodity
prices and weaker terms of trade; 2) lower productivity and
potential growth after years of resource misallocation during
the commodity and credit boom; and 3) higher leverage and
less favorable financing conditions due to market expectations
for higher US interest rates.
MXN
PEN
Average
7%
5%
3%
1%
-1%
-3%
2014
2013
2012
2011
2010
2009
-5%
2008
Latam currencies have been on a weakening trend since they
peaked in 2011 and depreciation has accelerated since the
second half of last year.
COP
2007
 We are relatively more constructive on CLP and MXN, but
remain bearish BRL, COP and PEN.
CLP
2006
 However, if unaccompanied by improved growth prospects,
tighter policy and intervention will have limited impact, in our
view.
BRL
9%
2005
 But currency depreciation could become a problem because
of inflation or financial stability, leading to relatively tighter
monetary policy and FX intervention.
Basic Balance (% of GDP)
2004
 Additional depreciation seems necessary to push for macro
rebalancing and restoring productivity in the region.
Exhibit 1
2003
 Currencies have quickly adjusted largely as expected to
lower commodity prices as REERS appear broadly in line
with lower terms of trade.
2002
 In this piece, we examine where the depreciation is enough,
and where more is needed.
2001
 LatAm currencies have depreciated significantly, due to
falling commodity prices, deficient productivity, and broader
USD strength.
Note that higher external financing needs due to the weaker
current account balance and lower capital inflows because of
lower foreign direct investment in commodity related activities
have a cumulative impact and make the external balance
more dependent on less reliable capital inflows from credit
and portfolio investment, as seen in Exhibit 1. Only CLP has
seen an improvement in the basic balance over the past year,
while the sharpest deterioration has been in PEN.
2000
Felipe Hernandez, Dara Blume
Source: Haver Analytics, Morgan Stanley Research. Basic Balance is CA + FDI.
Lower commodity prices also imply weaker terms of trade and
are a drag on income, domestic demand and growth outlook
that also weigh on currencies. What’s more, historically the
REER is often driven by terms of trade, suggesting weaker
terms of trade will drive currency depreciation.
Why Have Currencies Depreciated?
Lower potential growth: Productivity and potential growth in
the region remain under pressure and continue to weigh on
currencies. High commodity prices and low interest rates
drove labor and capital into commodities and non-tradable
sectors with low productivity during the commodity and credit
boom. As a result, overall productivity has declined and
dragged potential growth down and current and expected
returns on investment are no longer attracting new capital or
driving net outflows that explain weakening pressure.
Lower commodity prices: Latam is a net commodity
exporter and lower prices imply less export revenues and
weaker trade balance and current account results. The region
is an important recipient of capital inflows from foreign direct
investment into commodity-related activities that also tend to
decline when prices fall, particularly if there are concerns
about the price outlook.
Absent structural reforms to boost productivity and potential
growth the burden has been on currencies to push macro
rebalancing and reallocation of labor and capital into more
productive sectors. The debate on reforms has died down
since the approval of reforms in Mexico last year with no
significant initiatives now being debated in the region. MXN
has depreciated despite reforms but consistently outperforms.
Given the large moves already we examine where more
adjustment is needed and where the adjustment process is
likely over. We find there is scope for further depreciation
against the USD and opportunities for relative value trades.
We prefer MXN and CLP over BRL, COP and PEN.
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MORGAN STANLEY RESEARCH
March 5, 2015
FX Pulse
Higher leverage and US interest rates: Increasing evidence
of recovering economic activity and growing expectations for
interest rates to start rising in the US this year have bolstered
the USD and added to weakening pressure on Latam
currencies. Expectations for higher US interest rates also
imply less favorable financing conditions and add weakening
pressure, particularly now that, as mentioned above, financing
needs have increased and external accounts are more
dependent on credit and portfolio flows.
Although domestic interests are relatively high, this is due
mainly to risks and imbalances rather than robust economic
potential. With interest rate differentials set to narrow, and
carry offering little support to currencies – as can be seen in
BRL and COP – we believe that relatively high interest rates
are unlikely to support Latam currencies.
in the early 2000s, which are probably consistent with a more
appropriate level of the REER.
With little appetite for structural reform, currencies have done
most of the adjustment to push a macro rebalancing until now.
Valuations have improved, as seen above, but the exchange
rate correction still does not seem to be enough in some
countries. Eroding trade balance and current account results
and weak activity in manufacturing and tradable sectors are
all signs that macro rebalancing is not complete. Resilient
import demand and still-weak non-commodity exports also
illustrate that there is room for weaker and more competitive
currencies in many of these countries.
Exhibit 3
Manufacturing Production in LatAm (YoY)
20%
Where Have Currencies Depreciated Enough?
15%
Currencies have quickly adjusted to lower commodity prices
and weaker terms of trade. The depreciation we have seen
thus far has made valuation more attractive in some LatAm
currencies. COP, for example has seen its REER fall over the
past six months, moving it below the 10-year moving average.
Chile’s REER has also declined over the past six months, and
is now at more attractive valuation levels. On the other hand,
PEN stands out as the sole LatAm country where the REER is
above the 10-year average.
10%
Exhibit 2
BRL
5%
CLP
0%
COP
MXN
-5%
PEN
-10%
Average
-15%
-20%
2008
2009
2010
2011
2012
2013
2014
2015
Source: Haver Analytics, Morgan Stanley Research.
Terms of Trade and REER
130
LatAm Average
125
TOT
120
REER
115
110
105
100
95
90
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
85
Source: Haver Analytics, Morgan Stanley Research.
In Brazil, valuation on a historical basis is more attractive, but
note that this is partially because over the past ten years BRL
saw a significant amount of inflows that boosted its REER to
levels that were unjustified by its terms of trade. Indeed, since
2004, Brazil’s terms of trade have risen by only 15% while its
REER has risen 56%. It therefore is no surprise that on a
nominal level, USD/BRL is moving back towards levels seen
MXN and CLP are notable exceptions. Non-commodity
exports and manufacturing activity in Mexico maintain an
upward trend also bolstered by demand from the US. Real
export growth in Chile has stabilized and is picking up
somewhat. Manufacturing production is also trending higher.
Compare this with Brazil, where despite the depreciation seen
thus far, industrial production recently plunged further, or
Colombia, where a weaker currency has failed to drive noncommodity exports higher or lead to a rotation out of imports
into domestic goods. The positive trend in Mexico and sharp
improvement in Chile are notable and suggest that the
depreciation thus far is helping growth and further weakness
to restore productivity should be more limited, with scope to
bring valuations back to more sustainable levels and
outperform some of its peers in the region.
Monetary Policy Divergence
Weak growth figures could incentivize central banks to ease
monetary policy, which in many cases would exacerbate
currency depreciation. However, LatAm central banks are in a
8
MORGAN STANLEY RESEARCH
March 5, 2015
FX Pulse
difficult spot, as inflation has been more resilient and there is
already some evidence of currency depreciation pushing
prices of tradable goods and inflation higher in some
countries. This has been enough for various central banks to
turn more cautious and push back on expectations for cuts.
Peru is the, as the central bank is the only one in the region
cutting interest rates and reserve requirements to ease
monetary conditions. Together with decelerating activity, this
helps explain our expectations for more PEN depreciation.
In Chile, the central bank has noted that inflation has moved
well above target, partially due to exchange rate passthrough. With economic data improving and inflation on the
rise, the market has priced out the probability of rate cuts,
further supporting our constructive stance on CLP.
In Colombia, rising inflation has also brought a more cautious
central bank and led the market to moderate expectations for
interest rate cuts despite downward revisions to growth
forecasts. Although currency depreciation is not seen as the
main reason for higher prices officials mentioned it has
contributed and is one reason for their more cautious stance.
However, inflation remains within the target and given weak
growth the risks are skewed towards further easing, in our
view, which make COP less attractive.
No Support from Relatively High Interest Rates
However, higher interest rates are unlikely to be enough to
stabilize the currency if not accompanied by improving growth
and valuation. What’s more, one-off hikes are equally unlikely
to support the currency on their own – it would probably
require a more substantial hiking cycle to have an impact.
Relatively higher interest rates have provided little support for
currencies as real rates are not necessarily higher and are
mainly explained by efforts to prevent capital outflows, rather
than the result of more robust growth. Relatively high inflation
also implies more nominal depreciation is necessary in order
to achieve a more competitive real exchange rate.
Brazil is an excellent example here. Inflation in Brazil is high,
real interest rates are the highest in the region and it offers
amongst the highest carry in EM. However, none of this has
prevented BRL underperforming since June, not only on a
spot basis but also on a total returns basis. Political
uncertainty and an impending recession have driven the
currency weaker, and while much of the negative news is in
the price, we see room for further depreciation as we’ve
broken above key resistance levels in USD/BRL.
Limited Support from Intervention
Sharp currency depreciation is also raising concerns about
financial stability in some places where there is a risk that FX
moves could trigger capital outflows, from foreigners in local
bonds and from locals for foreign assets.
Central bank intervention to moderate volatility and exchange
rate depreciation has increased, but still allows for currencies
to depreciate. Central banks in Brazil, Peru and Mexico are all
now intervening, albeit with important differences. Although
international reserves remain at healthy levels and there is
room for more intervention this seems unlikely, in our view, as
officials acknowledge weakening pressure as partially
explained by the broader USD strengthening trend and still
see benefits from a more competitive exchange rate. Official
concerns are more about the speed of currency depreciation
than a particular level, as at current levels there are no signs
that Latam currencies are undervalued, as discussed above.
This is particularly a concern in countries where foreign
ownership of local assets is particularly high, such as Mexico
and Peru. See Economics and Strategy Insights: Mexico
Banter - Managing the Exit (27 Feb 2015). Although the
central bank has noted the impact of MXN depreciation on
prices, official concerns about currency weakness seem
better explained by worries about potential outflows from local
bonds.
Attempts to further boost intervention or hike interest rates to
limit currency depreciation could actually have the opposite
effect, and could be interpreted as evidence of growing
constraints on policy flexibility and obstacles for the necessary
macro adjustment and return to higher potential growth.
Sustained intervention using FX swaps seems self-defeating
in the medium-term as swaps are eventually unwound, and
will then put weakening pressure on currencies.
In Peru the central bank also worries about the impact of
currency depreciation on financial dollarization that remains
high and risks reversing the downtrend from previous years.
However, the central bank has relied on intervention rather
than interest rates to support the currency.
Intervention with FX swaps is proving to have short-term and
limited impact, as seen in Brazil. The central bank seems to
be moving away from this policy. We view the recent decision
not to roll USD 2.0bn of swaps as a sign that the central bank
is comfortable using fiscal and monetary policy as the anchor
High inflation in Brazil has been heretofore combatted with a
combination of FX intervention and monetary tightening.
However the central bank seems to be shifting away from
intervention and is increasingly relying on fiscal and monetary
policy to anchor inflation. This gives flexibility for further
currency depreciation, even with high inflation.
9
MORGAN STANLEY RESEARCH
March 5, 2015
FX Pulse
for the economy, and allowing currency depreciation to do
some of the rebalancing work, adding to pressure on BRL.
It is likely only a matter of time before PEN has to face a
similar reality. While the central bank has more reserves, its
exchange rate is likely overvalued and growth is soft. A
weaker currency would help mitigate these issues. The
central bank could continue to limit the pace of depreciation
and manage volatility, but it is unlikely to stand in the way of a
directional move in PEN over the medium term.
How to Trade It
To get a broader view of this, we have created a score card
that examines all of these factors, many of which are
discussed above. We find that on this basis, BRL, PEN, and
COP likely have further to go, while MXN and CLP seem to
have moved enough. In BRL, the REER remains significantly
overvalued due to the slew of inflows it received over the past
ten years, as mentioned above. With real interest rates high
and growth low, investment opportunities are likely to fade,
weighing on the FX. In Peru, the high share of commodity
exposure has weighed on growth, and valuations remain
elevated. We question whether central bank intervention will
be able to meaningfully push back on currency weakness. In
Colombia, valuations have improved, but the external and
fiscal accounts remain a concern as growth has not benefited
from the weaker currency. It is for this reason that despite
above-target inflation, the central bank could take a more
dovish tone.
On the other hand, in Mexico, commodity exposure is actually
relatively low, as our economists have highlighted. MXN was
never significantly overvalued and growth never dipped to the
extent that it did in other currencies in the region. With the
reform story still intact, we see scope for inflows into the
currency. Chile is the country that ticks many of the
requirements above. Terms of trade support current valuation
levels, which have improved tremendously as the nominal FX
depreciated. There are signs that the manufacturing sector is
recovering and exports are growing. Finally, the central bank
has moved away from its hawkish stance given rising inflation,
yet real interest rates remain negative, which should support
growth. While we expect USD strength to dominate and
would be reluctant to go short USD/MXN or USD/CLP, we
believe that both CLP and MXN are attractive as relative
value trades within Latin America.
Where are the Risks?
A sharp rebound in commodity prices could bolster export
revenues and support currencies in the short term. But higher
commodity prices would undermine conditions for macro
adjustments and de-incentivize any potential reforms.
Therefore, this could still be consistent with weaker currencies
in the medium term. A policy shift to support structural reforms
and increase productivity would reduce pressure on the
currency as the main adjustment mechanism. In a few
countries there is scope for additional counter cyclical fiscal
policy funded with savings in sovereign wealth funds that
could imply one-time capital inflows. Further delays in the US
rates lift-off could revive appetite for carry trades.
Exhibit 4
The LatAm ‘ScoreCard’: MXN and CLP Relative Outperformers
FX Moves
Change
against
Change
USD
in TWI
Since Jun 2014
CLP
-11.1%
-2.6%
MXN
-14.4%
-9.0%
COP
-25.0% -17.1%
PEN
-10.4%
-1.3%
BRL
-24.0% -11.8%
Average
-17.0%
-8.4%
Commodities
Valuation
Recovery
CurrentChange Real
Share Net
Commod 10Y Avg Change Change in Basic Export
of FDI Exports ity Index REER
in REER in ToT
Balance Growth
% of GDP since Jun
Since 2004
1 Year
34.7%
15.1%
-16.7%
-6.6%
-3.5%
50.0%
1.7%
0.9%
8.6%
1.6%
-29.4%
-5.7%
-11.5%
-8.8%
-1.0%
7.0%
49.0%
9.3%
-43.8%
-12.0%
21.2%
61.0%
-0.8%
-17.9%
58.3%
12.4%
-12.0%
6.1%
11.9%
47.4%
-1.6%
-9.4%
53.4%
3.8%
-21.8%
-1.0%
56.3%
15.3%
-0.1%
-3.8%
40.8%
8.4%
-24.7%
-3.8%
14.9%
33.0%
-0.4%
-4.6%
Monetary Policy
Inflation
Industrial Real
(Distance
Producti Interest from
on
Rate
Target) Reserves
Z-Score
% of GDP
0.19
-1.7%
1.5%
15.3%
-0.06
0.3%
0.1%
14.9%
-0.30
0.4%
0.9%
11.8%
-2.24
1.8%
0.7%
30.0%
-1.17
5.6%
2.9%
16.2%
-0.71
1.3%
1.2%
17.6%
Source: Morgan Stanley Research
10
MORGAN STANLEY RESEARCH
March 5, 2015
FX Pulse
JPY: Nikkei Hedge Flows Should Push USD/JPY Higher
Geoffrey Kendrick
 When underlying asset prices move quickly, extra hedging
flows (to maintain prior hedge ratios) can dominate other FX
portfolio flows.
 This was the case during Japan’s QQE1 run-up and was
potentially the reason why EUR/USD fell into the sovereign
QE announcement in January despite a lot of foreign inflows
to buy eurozone equities.
 At the end of 2014, foreign investors held JPY 172 trillion
(US$1.4 trillion) of Japanese equities.
 Since then, Japanese equities are up 7-8% whereas
USD/JPY is unchanged. However, to maintain our estimated
60% hedge ratio, an extra US$65 billion of USD/JPY should
have been bought.
 Either hedge ratios are changing or their timing has been
delayed. We expect the latter.
 We reiterate our year-end target for USD/JPY of 127.
In December, we argued that equity-related FX hedging flows
could dominate if the ECB ended up undertaking sovereign
QE (see EUR: What if the ECB Does Sovereign QE?
December 11, 2014). Specifically, we argued that in the case
of a EURO STOXX bounce of 10%+ and FX hedge ratios of
30%+, ECB sovereign QE would result in net EUR selling (by
equity accounts).
Since that report, and as ECB sovereign QE became more
probable and was then announced in January, EURO STOXX
is up 13% and EUR/USD is down 10%. While other factors
have clearly been involved, the opposite hype of “ECB QE will
create inflows and therefore EUR support” has not
materialized.
Exhibit 1
Cumulative Japanese Portfolio Flows
JPYtrn
20
15
10
JPY selling
5
0
-5
-10
-15
JPY buying
Foreign buying Japanese stocks
Foreign buying Japanese bonds
-20
Japan buying foreign stocks
-25
Jan-12
Japan buying foreign bonds
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Source: MoF, Bloomberg, Morgan Stanley Research
Also included in this chart are assumptions about hedge ratios
employed on each of the four categories. In our previous note
we explained that as Japanese lifers hedge around 60% of
foreign assets, we would use 60% for the ‘Japan buying
foreign bonds’ category. For ‘Japan buying foreign stocks’ we
have assumed no hedging on the view that with JPY falling
through this period, incentives to hedge equity positions would
be low. For ‘foreign buying of Japanese stocks’ (and bonds)
we used ETF flow data since the start of Abenomics as a
guide. At that time inflows to Japanese equities had been
around 50% hedged, something we now update to 60%
hedged as per Exhibit 2.
Exhibit 2
Cumulative Flows: Japan Equity ETFs
13000
USDmn
11000
In that report, we used the Japanese example from the QQE1
run-up to argue that these FX flows dominate. In this report,
and with the Nikkei the strongest major bourse year-to-date
(+7%), we turn the argument back onto JPY to ask whether
the current Nikkei/JPY disconnect can continue, or whether
USD/JPY is due some catch-up.
9000
Exhibit 1 displays the four high-level flow categories in and
out of Japan. Most simply, since the run-up to QQE1 began,
foreign investors have net bought Japanese equity and
bonds, while Japanese investors have bought foreign bonds
but net sold foreign equities (presumably repatriating money
to invest in local assets instead).
1000
Start of
Abenomics
7000
5000
FX Hedged
3000
FX Unhedged
-1000
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
Dec-14
Source: Bloomberg, Morgan Stanley Research
11
MORGAN STANLEY RESEARCH
March 5, 2015
FX Pulse
While these hedge ratios define the degree of the cumulative
flows in Exhibit 1, where they become really important is when
we consider extra hedging requirements as underlying asset
prices move. For example, if a USD-based investor bought
US$100 million of the Nikkei pre-Abenomics (60% FXhedged) then once the Nikkei doubled (via the implementation
of QQE1) they would need to buy another US$60 million of
USD/JPY just to maintain their overall 60% hedge ratio.
Exhibit 4
The accumulation of these examples creates the ‘foreign
extra hedging stocks’ line in Exhibit 3.
20
Exhibit 3
Cumulative Flows
60
Foreign buying
Japanese stocks
50
Foreign buying
Japanese bonds
JPY selling
30
Japan buying foreign
stocks
20
Japan buying foreign
bonds
10
Foreign extra hedging
stocks
0
-10
-20
Jan-12
JPYtrn
45
Foreign extra hedging
bonds
JPY buying
Oct-12
Jul-13
Apr-14
Jan-15
Source: MoF, Bloomberg, Morgan Stanley Research
Indeed, given the huge increase in Japanese equity prices
over the past three years, it is those extra hedging flows (due
to existing holdings) that dominate all other portfolio flows in
and out of Japan.
125
Cumulative JPY selling (lhs)
120
40
35
USD/JPY (rhs)
115
110
30
105
25
100
95
15
90
10
85
5
80
0
Jan-12
JPYtrn
40
Cumulative Flows Track USD/JPY
75
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Source: MoF, Bloomberg, Morgan Stanley Research
This brings us the crux of the immediate implication for
USD/JPY. At the end of 2014, foreign investors held around
JPY 172 trillion in Japanese equities (US$1.4 trillion). Since
then, USD/JPY is almost exactly sideways but Japanese
equities are up 7-8% depending on which index you use. If
hedge ratios are to be held at our estimated 60%, this would
imply extra selling of JPY 8 trillion (US$65 billion buying of
USD/JPY) just for extra hedging purposes.
The simple linear comparison between net JPY selling and
USD/JPY suggests that JPY 8 trillion is equivalent to
somewhere between 5 and 10 big figures in USD/JPY.
We reiterate our year-end USD/JPY target of 127.
And as a result of that hedging flow dominance, we can
explain most of the movement in USD/JPY through this period
via Exhibit 4.
12
MORGAN STANLEY RESEARCH
March 5, 2015
FX Pulse
Strategic FX Portfolio Trade Recommendations
Evan Brown, Vandit D. Shah
Enter: NY Close; Target: 8.880; Stop: 9.315
Strong German Economy Lifts Sweden
13
12
Enter: NY Close; Target: 4.28; Stop: 4.02
Growth Stronger in Chile than Colombia
German Unemployment Rate
11
10
9
8
7
6
20%
Enter: NY Close; Target: 4.25; Stop: 3.90
Limit Order:
Buy
USD/ILS
12-Feb-15
Hold:
Short
AUD/USD
80%
60%
10%
40%
5%
20%
0%
0%
-20%
-5%
-40%
-10%
-60%
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
-100%
2002
-80%
-20%
2001
-15%
2000
Limit Order:
Buy
CLP/COP
Both CLP and COP have seen a significant amount of currency
depreciation over the past six months, but this has resulted in very
different outcomes. In Chile, depreciation has generated a boost in
exports and domestic demand, while in Colombia, despite the large
depreciation non-oil exports are soft and the manufacturing sector
continues to waver. We see relative value in being long CLP/COP .
100%
CLP-COP Manufacturing Growth (YoY)
CLP-COP Export Growth (YoY, RHS)
15%
2003
Limit Order:
Sell
EUR/SEK
From the perspective of Germany, the ECB monetary policy stance is
ultra-loose given the strength of its economy. We believe SEK will
disproportionately benefit from Germany’s booming economy and
stimulus, given large export linkages. This is already beginning to show
in Sweden’s data, with GDP and IP surprising to the upside. The key
risk to this trade is a fall in Swedish inflation, potentially leading to
further easing from the Riksbank.
BoI Steps Up Interventions
Data released this week shows that the BoI has started to intervene
more aggressively to manage the ILS TWI weaker. Should the BoI be
successful in steering market expectations for more ILS weakness,
then it is likely that the correlation between EUR/USD and USD/ILS will
reassert itself. This correlation is based on the premise that the BoI
targets the ILS TWI to which the EUR holds the highest single
weighting. As such further declines in EUR/USD will require more
significant policy driven moves higher in USD/ILS for the ILS TWI to not
appreciate. The key risk is disappointing data out of the US.
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. Despite the Bank not cutting this week, we still expect 2 more
25bp cuts this year (May and August) with our economists’ forecast for
growth below consensus at 1.9%y. What’s more, economic data from
China continue to print weak and our iron-ore analysts remain
bearish, with AUD also vulnerable to higher US front-end yields.
13
MORGAN STANLEY RESEARCH
March 5, 2015
FX Pulse
12-Feb-15
Hold:
Short
EUR/INR
23-Feb-15
Hold:
Long
USD/TRY
12-Feb-15
Hold:
Long
USD/PEN
Enter: 71.05; Target: 64.00; Stop: 71.00
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. Postthe budget and another surprise RBI rate cut, we maintain our stance
on long INR positions as 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: 2.7500; Stop: 2.5000
Past CBT Easing Cycles
We raise our USD/TRY target to 2.75 from 2.65 as risks surrounding
US yields and CBT monetary policy keep us bullish. On domestic
monetary policy, we think further easing will fuel concerns on
declining real yields leaving TRY vulnerable to the external
environment; however, even if the CBT takes a more prudent course,
TRY gains will 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 lower given Turkey’s high external financing
needs. For more, see EM FX Trades: Buy USD/TRY (23 Feb 2015).
Enter: 3.0690; Target: 3.26; Stop: 3.0600
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 with Chinese
policymakers lowering their growth target to 7.0%y this week. 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.
20-Feb-15
Enter: 0.9400; Target: 1.0000; Stop: 0.9400
Hold:
Long
USD/CHF
Switzerland’s policymakers face an urgent struggle against the rise in
their real effective 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.
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).
Switzerland Risks Falling into Deflation
THB REER Has Appreciated Sharply
14
MORGAN STANLEY RESEARCH
March 5, 2015
FX Pulse
05-Feb-15
Enter: 4.16; Closed at 4.15 on March 4, 2015
Closed:
Long
EUR/PLN
Despite the 50bp rate cut from the NBP, indications that the easing
cycle is over provided support to the zloty with the Bank not talking
down the currency lower either. The NBP may still intervene in the FX
market if it deems zloty strength to be excessive but none of the
communication suggested that this would be an imminent headwind
for PLN. For now, we have closed our long EUR/PLN position (Poland
Economics and Strategy: 50 and Done? (04 Mar 2015)).
8-Jan-15
Enter: 46.74; Target: 45.00; Stop: 46.20
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. Indeed, we
expect the MAS to further reduce the slope of appreciation in the April
meeting. We 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.
20-Feb-15
Enter: 1.2450; Close at NY Close on March 5, 2015
Closed:
Long
USD/CAD
5-Feb-15
Hold:
EUR/USD put
spread
PLN Faces Deflationary Pressures
Change in C/A Balance Favors India
Canada ULC Still Relatively High
With the BoC firmly on hold for now, we think there is room for some
consolidation in USDCAD. As such, we close our long USD/CAD
position for now looking to buy at better levels. 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 in Canada. The rise in manufacturing unit labor costs
suggest Canada will gain less from US growth than in the past, and
hence, we will look to buy dips.
Buying a 3m 1.1250/1.0850 put spread
Greece: Key Maturities in July &August
We initiated our EURUSD put spread to position for downward moves
over the coming months due to political uncertainty and dovish ECB
guidance. While we have seen some positive political headlines and
strong Eurozone data lately, enough uncertainty lingers. As such, we
keep our put spread on to position for further weakness.
Source for all charts: Bloomberg, Haver Analytics, Macrobond, Reuters EcoWin, Morgan Stanley Research
15
MORGAN STANLEY RESEARCH
March 5, 2015
FX Pulse
Strategic FX Portfolio
Trade Recommendation
Notional
Nominal
Weight
Entry Date
Entry Level
Current
Stop
Target
Spot P&L
Carry
P&L
Portfolio
Contribution
Closed Trades
Long EUR/PLN
$10.0mn
9.7%
5-Feb-15
Long USD/CAD
$10.0mn
9.7%
20-Feb-15
4.16
Closed at 4.15 Mar 4, 2015
Short SGD/INR
$10.0mn
9.7%
8-Jan-15
46.74
45.46
46.20
45.00
Long USD/THB
$10.0mn
9.7%
29-Jan-15
32.78
32.45
31.75
35.00
-$100.1k
-$28.8k
-$128.9k
Short AUD/USD
$10.0mn
9.7%
12-Feb-15
0.7735
0.7760
0.8000
0.6900
-$32.3k
-$11.9k
-$44.2k
Long USD/PEN
$10.0mn
9.7%
12-Feb-15
3.0690
3.0995
3.0600
3.2600
$98.4k
-$32.3k
$66.1k
Short EUR/INR
$10.0mn
9.7%
12-Feb-15
71.05
68.59
71.00
64.00
$345.9k
$46.1k
$392.0k
Long USD/CHF
$10.0mn
9.7%
20-Feb-15
0.9400
0.9738
0.9400
1.0000
$346.1k
$2.2k
$348.3k
Long USD/TRY
$10.0mn
9.7%
23-Feb-15
2.4600
2.6153
2.5000
2.7500
$593.8k
-$27.7k
$566.1k
Sell EUR/SEK
$10.0mn
Enter at NY Close Mar 5, 2015
9.1989
9.3150
8.8800
Buy USD/ILS
$10.0mn
Enter at NY Close Mar 5, 2015
4.00
3.90
4.25
Buy CLP/COP
$10.0mn
Enter at NY Close Mar 5, 2015
4.08
4.02
4.28
Cash
$11.6mn
1.2450 Close at NY Close Mar 5, 2015
-$31.5k
-$15.5k
-$47.0k
$29.6k
-$2.3k
$27.3k
Active Trades
$275.6k $125.6k
$401.1k
Lim it Trades
Portfolio Mark to Market
11.3%
$102.7mn
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).
Sim ulated Managed Account Monthly Gross Perform ance - %
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
0.85
3.15%
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%
1.0999
1.1254
9.45%
10.73%
3.20%
1.25%
P&L
$108.5k
$163.8k
-$55.3k
16
MORGAN STANLEY RESEARCH
March 5, 2015
FX Pulse
Click here for interactive currency
pages:
G10 Currency Summary
Dara Blume and Sheena Shah
USD
Dollar Data Dependence
6.7%
We believe USD should continue its upward trend over the medium term as data are improving and growth in the US on the
whole is strong relative to the rest of the world. USD is likely to be more sensitive to data over coming weeks given the Fed’s
increasingly data dependent stance - price action in response to recent inflation and ISM prints suggest this has already been
the case. As a result, we would put particular focus on the upcoming payrolls and retail sales reports.
EUR
Focus Back on ECB
-7.3%
The ECB meeting was largely as expected, and we remain bearish on the currency. QE is now scheduled to begin next week,
and the central bank has made clear both that it is willing to buy bonds yielding a negative return and that it is committed to
continuing its program through September 2016. Both of these facts should reduce market concerns that the central bank may
backpedal from its easing policy, weighing on the currency.
Bullish
Bearish
Watch: Payrolls, Trade, Credit, Retail Sales, PPI
Watch: Current Account, GDP, M3, PPI, Machine Orders, IP
JPY
A Brighter Picture
- 2.0%
JPY continues to show signs of reflation, most notably with the latest pickup in wage data. Further signs of robust growth and
greenshoots for the economy suggest the BoJ will not ease further this year, even as central banks in many other G10
countries introduce or expand extraordinary easing measures. This should support JPY, particularly on the crosses. USDJPY
is likely to move alongside US interest rates, and Friday’s payrolls print will be important for the cross.
GBP
GBP – Support on Crosses
- 1.1%
We remain bearish GBP against USD, as we believe election uncertainty could dominate price action in the run-up to the May
vote. This uncertainty could make it more difficult to fund the UK’s widening current account deficit. However, GBP could see
some support on the crosses, as data in the UK remains relatively robust, and within Europe, the UK is actually one of the
currencies that offers higher yields.
CHF
CPI in Focus
- 4.1%
We expect CHF to continue its underperformance. The upcoming FX reserves and CPI releases will be important. The
former provides insight as to how heavy handed central bank intervention has been in a post-floor environment, while the
latter will help gauge how much more weakness may be needed. We think that the Swiss central bank is likely to remain
focused on weakening its currency against a broader mix of currencies.
CAD
A Shift in Tone
Neutral
Watch: Trade, Housing Starts, Employment
The BoC’s rate cuts surprised markets by taking a March rate cut off the table last week, and the hawkish surprises
continued at yesterday’s BoC meeting. The central bank shifted further away from additional easing, arguing that
financial conditions are easier and risks around the inflation profile are more balanced. A more hawkish BoC, combined
with a recent rebound in oil prices, has driven us to take a more neutral stance on CAD, removing our USD/CAD long.
RBA Decision Only a Delay
Bearish
Watch: Business Confidence, Home Loans, Employment,
9.6%
AUD
Neutral
Neutral
Bearish
Watch: Current Account, GDP, M3,Industrial Production
Watch: Industrial Production, Trade
Watch: SNB FX Reserves, CPI, Sight Deposits, Unemployment Rate
- 5.7%
The latest RBA meeting postponed but did not cancel further policy easing. We expect two further cuts from the central
bank. What’s more, monetary policymakers maintain their view that a weaker currency is needed to rebalance the
economy. With Chinese growth forecasts being revised lower, we expect AUD to weaken as a result of both domestic
and external forces.
NZD
All eyes on RBNZ
- 2.4%
The RBNZ meeting next week will be crucial for NZD. A more dovish stance could be the catalyst for a downtrend in the
currency, but without such an outcome, we believe NZD could remain attractive given its relative carry and neutral to
hawkish central bank. The main risk is that the central bank sounds hawkish but intervenes in currency markets to cap
any FX strength.
SEK
Room for More
10.9%
EURSEK could have further to go in the near term, as improved growth and inflation dynamics in Sweden make further
central bank easing unlikely, while the ECB beginning its QE program is likely to pressure EUR. Signs of reflation in
Europe are likely to spillover to Sweden, providing support to SEK. We believe the central bank would object to excessive
currency strength, but see scope for EURSEK to head towards the 9.00-9.10 range.
Still At Risk
Bearish
Watch: Industrial Production, Regional Network, CPI, PPI
NOK
5.2%
Neutral
Neutral
Watch: Manufacturing Activity, RBNZ ,Food Prices, PMI
Watch: CPI, Unemployment
We are approaching the key 8.50 level in EURNOK, just above the 200 DMA. We believe that NOK could indeed strengthen
towards those levels, as oil prices have risen and growth indicators have been reasonably strong – on this front the upcoming
regional network report will be noteworthy. That said, even with oil prices stabilizing, the decline seen thus far will require a
swift adjustment in Norway’s non-oil sector to improve competitiveness. Currency depreciation can help with this.
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
17
MORGAN STANLEY RESEARCH
March 5, 2015
FX Pulse
EM Currency Summary
Jessica Liang (AXJ), Meena Bassily (CEEMEA), Felipe Hernandez and Dara Blume (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 of gradual appreciation 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.
We expect USD/KRW to head higher over the medium term. While the Bank of Korea remains reluctant to ease
rates, with recent weak export data and an elevated REER, we think they will eventually act and undertake
measures to try to weaken the currency to raise competitiveness.
We believe MYR can tactically correct higher, as near-term stability in oil prices and improving trade data can
support the currency. However, we remain medium term bears as we expect the BNM to cut rates by 50bps and
MYR remains vulnerable to an extended period of low oil 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
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 economists now expecting the BoT to cut rates by 50bps, we are bearish on THB.
EUR/CZK continues to head higher with the EUR weakening across the board and the chances of the CNB
raising the EUR//CZK floor having come down with recent comments from the President which were opposed to
the previous devaluation of the CZK. We think the floor at 27 will stay in place for a prolonged period of time.
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. With EUR/HUF declining on the back of ECB actions, a new easing cycle from
the NBH may help slow the decline in EUR/HUF. Also, HUF may underperform PLN, with the NBP on hold now.
The BoI has backed recent rhetoric on wanting a weaker exchange rate with both policy rate cuts and
discretionary interventions which were as high as USD 800m over February. As such we enter a long USD/ILS
recommendation.
The NBP delivered a 50bp rate cut, however they also explicitly signalled an end to the easing cycle. In addition
the NBP did not show much concern with potential PLN strengthening. As such EUR/PLN may continue to grind
lower with no expectation of dovish policy and the bar for concern with FX strength being somewhat high.
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 are approaching our 2.65 target on the long USD/TRY recommendation. As such we extend the target to 2.75
to increase our flexibility. Given the pace of the move there is increased risk of some form of policy response and
we think any tightening of liquidity could drive a brief correction lower in USD/TRY given the extent of the move.
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. However policy risks are considerably lower
than regional peers; therefore at this stage we do prefer to short other EM currencies such as TRY.
BRL has moved quickly past 2.90, and is now approaching key levels which, if broken, could drive another rapid
move higher. Negative headlines and political concerns continue to pressure the currency. Importantly, the
central bank’s decision not to roll all of its swaps suggests it is more comfortable with allowing the currency to
depreciate. We see increasing downside risks to the currency.
Chilean economic data continues to come in strong, suggesting the currency depreciation seen thus far has fed
through into the economy. Both external trade and domestic activity are picking up. Valuation has also improved
in CLP and the REER is back at more reasonable levels, in our view. We are increasingly constructive on CLP.
Despite the pickup in oil prices COP has underperformed over the past week, as concerns about growth
dominate. The latest news that EcoPetrol will reduce its dividends is a symptom of this impact. Though
valuations in Colombia are becoming more attractive, we think further depreciation is needed still.
We expect MXN to outperform over the medium term given the reforms already made and the links to the
strengthening US economy. The main risk to our bullish MXN view is broad USD outperformance, as USD/MXN
trades with a high beta to USD/EM.
USD/PEN continues to flirt with higher levels, and we think it is only a matter of time before central bank
intervention relents and the cross rises. Indeed, monetary authorities are more concerned with the pace than the
direction of the FX move, and with dollarization falling, there is room for further depreciation.
Charts show 1M performance against USD, as normally quoted
18
MORGAN STANLEY RESEARCH
March 5, 2015
FX Pulse
Global Event Risk Calendar
Charles Rubenfeld
Date
Day
6-Mar
Fri
8-Mar
9-Mar
10-Mar
11-Mar
12-Mar
13-Mar
Time
(Ldn)
Ccy
Event
13:30
13:30
06:25
08:15
10:00
05:00
09:00
07:00
13:30
13:30
13:30
CAD
CAD
CHF
CHF
EUR
JPY
NOK
SEK
USD
USD
USD
Building Permits (MoM)
Trade Balance
SNB FY Earnings
CPI (YoY)
Eurozone GDP (QoQ)
Leading Index CI
Industrial Production (MoM)
Riksbank's Ingves spks (Stockholm)
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
14:00
23:50
N/A
08:30
14:00
AUD
CAD
CHF
CHF
EUR
JPY
JPY
SEK
USD
Consumer Confidence
Housing Starts
SNB Sight Deposits
Retail Sales Real (YoY)
Ecofin Meeting
M3 (YoY)
Eco Watchers Survey Outlook
Household Consumption
Labor Market Conditions Index
00:30
06:45
01:30
23:50
09:00
14:00
14:00
AUD
CHF
CNY
JPY
NOK
USD
USD
05:30
09:30
23:50
20:00
07:00
08:30
07:30
Ref.
Period
MS forecast
Jan
Jan
Market
Previous
-4%
-1B
7.7%
-0.65B
Feb
4Q P
Jan P
Jan
0.3%
106.4
-0.6%
0.3%
105.8
-0.5%
0.3%
105.6
0.3%
Feb
Feb
Jan
250k
5.6%
-38.5b
235k
5.6%
-41.5B
257k
5.7%
-46.6B
6B
14%
60.03B
-3.3%
¥-395.6B
2.2%
Sun
Feb
Feb
Jan
4Q F
2.2%
Mon
Feb
112.5
187k
Jan
1.9%
Feb
Feb
Jan
Feb
2.8%
50
-1.3
4.9%
NAB Business Confidence
Unemployment Rate
CPI (YoY)
Machine Orders (MoM)
CPI Underlying (YoY)
Wholesale Inventories (MoM)
JOLTs Job Openings
Feb
Feb
Feb
Jan
Feb
Jan
Jan
3
3.5%
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
00:30
07:00
10:00
09:30
N/A
21:30
23:00
08:30
12:30
12:30
14:00
AUD
EUR
EUR
GBP
KRW
NZD
PEN
SEK
USD
USD
USD
Employment Change
German CPI (YoY)
Industrial Production (MoM)
Visible Trade Balance GBP/Mn
BoK Rates Decision
Manufacturing PMI
BCRP Rates Decision
Unemployment Rate
Retail Sales Advance (MoM)
Initial Jobless Claims
Business Inventories
Feb
Feb F
Jan
Jan
12:30
12:30
04:30
10:30
14:00
CAD
CAD
JPY
RUB
USD
Unemployment Rate
Employment Change
Industrial Production (MoM)
CBR Rates Decision
Univ. of Michigan Confidence
Feb
Feb
Jan F
21:30
NZD
Performance Services Index
Tue
1%
-0.2%
Wed
15%
3.50%
3.5%
15.7%
-0.2%
-0.3%
3.5%
1.75%
2%
-0.21%
2%
Feb
Thu
3.25%
3.25%
0.6%
0.5%
295k
0.1%
-12.2k
0.1%
0%
£-10154
2%
50.9
3.25%
8.4%
-0.8%
313k
0.1%
96
6.6%
35.4k
4%
15%
95.4
1.75%
Feb
Mar
Feb
Feb
Jan
Fri
15-Mar
Sun
16-Mar
Mon
14%
Mar P
Feb
57.8
19
MORGAN STANLEY RESEARCH
March 5, 2015
FX Pulse
17-Mar
18-Mar
19-Mar
20-Mar
07-Apr
09-Apr
15-Apr
15-Apr
29-Apr
22:30
12:30
13:00
08:00
09:00
13:00
12:30
13:15
13:15
14:00
20:00
AUD
CAD
CAD
CHF
NOK
PLN
USD
USD
USD
USD
USD
Consumer Confidence
Int'l Securities Transactions
Existing Home Sales (MoM)
SNB Sight Deposits
Trade Balance
CPI Core (YoY)
Empire Manufacturing
Industrial Production (MoM)
Capacity Utilization
NAHB Housing Market Index
Total Net TIC Flows
00:30
23:30
12:30
10:00
10:00
10:00
N/A
N/A
03:00
05:00
23:50
N/A
N/A
12:00
12:30
AUD
AUD
CAD
EUR
EUR
EUR
IDR
ILS
JPY
JPY
JPY
JPY
NZD
TRY
USD
RBA Minutes
Westpac Leading Index (MoM)
Manufacturing Sales (MoM)
German ZEW Survey Expectations
Eurozone ZEW Survey Expectations
CPI (YoY)
BI Rates Decision
Israel Elections
BoJ Press Conference
Leading Index CI
Trade Balance
BoJ Rates Decision
Global Dairy Trade Announces Milk Auction Results
CBT Rates Decision
Housing Starts
10:00
01:30
10:00
09:30
09:30
09:30
21:45
08:30
18:00
CHF
CNY
EUR
GBP
GBP
GBP
NZD
SEK
USD
07:00
08:30
09:00
21:00
04:30
23:50
09:00
09:30
12:30
12:30
14:00
14:00
112.5
-13.5B
-3.1%
Jan
Feb
Feb
Feb
Mar
Feb
Feb
Mar
Jan
0.5%
27.1B
0.5%
7.78
0.15%
79.4%
55
-174.8B
Tue
Feb
Jan
Mar
Mar
Feb F
0.1%
1.68%
53
52.7
-0.3%
7.5%
7.5%
Jan F
Feb
105.8
0.1%
0.1%
7.25%
105.6
-1179.1B
0.1%
Feb
7.5%
1065k
ZEW Survey Expectations
China February Property Prices
Construction Output (MoM)
Average Weekly Earnings (3M/Y) (excl. bonuses)
ILO Unemployment Rate 3Mths
BoE Minutes
GDP (QoQ)
Riksbank's Ingves spks
FOMC Rate Decision
Mar
-73
Jan
Jan
Jan
-0.8%
2.1%
5.7%
4Q
1%
CHF
CHF
CHF
CLP
JPY
JPY
NOK
NOK
USD
USD
USD
USD
Trade Balance
SNB Rates Decision
SNB's Jordan spks
CBCH Rates Decision
All Industry Activity Index (MoM)
BoJ Minutes
Norges Bank Rates Decision
Norges Bank Press Conference
Current Account Balance
Initial Jobless Claims
Philadelphia Fed Business Outlook
Leading Index
Feb
AUD
CAD
CAD
EUR
GBP
NOK
NZD
NZD
RBA's Stevens spks (Melbourne)
CPI (YoY)
Retail Sales (MoM)
Euro-area Current Account
PSNB ex Interventions
Norges Bank's Olsen spks
ANZ Consumer Confidence Index
Credit Card Spending (MoM)
AUD
GBP
EUR
CAD
SEK
RBA Rates Decision
BoE Rates Decision
ECB Rates Decision
BoC Rates Decision
Riksbank Rates Decision
Wed
0.25%
0.25%
0.25%
Thu
3.43B
-0.75%
-0.75%
3%
3%
-0.3%
0.75%
1.25%
Jan
4Q
Mar
Feb
-100.26
313k
5.2
0.2%
Feb
Jan
Jan
Feb
1%
-2%
17.796B
-8.75B
Mar
Feb
124
1.9%
295k
Fri
02:10
12:30
12:30
09:00
09:30
03:30
00:00
02:00
Upcoming Risk Events
05:30
12:00
12:45
15:00
08:30
Apr
Apr
Apr
Apr
Apr
2.25%
0.50%
0.05%
0.75%
2.25%
0.50%
0.05%
0.75%
-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
20
MORGAN STANLEY RESEARCH
March 5, 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.
21
MORGAN STANLEY RESEARCH
March 5, 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)
13.0
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
-5%
-6%
12.0
11.0
10.0
9.0
8.0
7.0
DXY NZD AUD CAD GBP SEK JPY NOK EUR CHF
Monthly
Weekly
6.0
5.0
Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15
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
-2
-5
-3
-10
CAD
SEK
USD
NZD
AUD
Current
JPY
GBP
CHF
NOK
EUR
-4
-5
Mar-14
Last week
May-14
Jul-14
Sep-14
Source: Bloomberg, Morgan Stanley Research
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
Nov-14
Jan-15
NZD
96
CHF
94
92
MXN
90
GBP
88
CAD
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
Mar-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
22
MORGAN STANLEY RESEARCH
March 5, 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
7
-10
7
1
8
USD
-6
-9
7
-6
0
-9
EUR
9
10
8
-7
-4
-7
JPY
-9
-3
-5
6
1
-6
GBP
9
-1
3
-9
CHF
3
-4
0
-4
CAD
9
-8
-3
1
-4
AUD
-9
-5
-2
-3
Toshin


USD
1
0
EUR
-4
-4
JPY
1
1
GBP
-3
-3
CHF
0
0
CAD
-2
-2
AUD
-1
-1
NZD
-4
-4

0
NOK
-4
-4

0
-8
NOK
SEK
-3
-3
-7
1
SEK
-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2
3 4 5 6 7 8
 







9 10
-1

Since Monday, March 2, positioning in
currencies has shifted. In the majors, the
largest shorts are in EUR. There are no
significant longs in the G10.

USD positioning is moving back towards
long. Intra-week global macro hedge
funds were buyers, and bullish sentiment
increased.

EUR shorts remain relatively unchanged.
Though the market is generally bearish,
Japanese retail were small buyers this
week.

We will provide a full updated report and
refresh positioning scores for all of our
underlying sub-indicators on Monday.
Sentiment
NZD
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.
23
MORGAN STANLEY RESEARCH
March 5, 2015
FX Pulse
Central Bank Watch
Next rate
Market
MS
decision
expects (bp)
expects (bp)
US
18 Mar
0
0
Euro Area
15 Apr
-2
Japan
17 Mar
0
UK
09 Apr
Canada
15 Apr
Switzerland
Sweden
Norway
Australia
0
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
-5
0
0.75
19 Mar
2
0
-0.75
0.00
0.00
0.00
0.00
29 Apr
-2
0
-0.10
-0.10
-0.10
-0.10
-0.10
19 Mar
-9
-50
1.25
0.75
0.75
0.75
0.75
07 Apr
-11
0
2.25
2.25
2.00
1.75
1.75
New Zealand
11 Mar
-1
0
3.5
3.50
3.50
3.50
3.50
Russia
13 Mar
-
-100
15
14.00
13.00
12.00
11.00
Poland
15 Apr
1
0
1.50
1.50
1.50
1.50
1.50
Czech Rep
26 Mar
-1
0
0.05
0.05
0.05
0.05
0.05
Hungary
21 Mar
-9
-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
0
0
0.10
0.10
0.10
0.10
0.10
South Africa
26 Mar
12
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
-
-
-
5.35
5.35
5.10
5.10
5.10
India
07 Apr
-
0
7.50
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
07 May
-
-
3.25
-
-
-
-
Thailand
11 Mar
0
-25
2
1.75
1.50
1.50
1.50
Brazil
29 Apr
43
-
12.75
-
-
-
-
Mexico
26 Mar
4
0
3
3.00
3.00
3.00
3.50
Chile
19 Mar
-5
0
3
3
3
2.75
2.75
Peru
12 Mar
-
0
3.25
3.25
3.00
3.00
3.25
Colombia
20 Mar
-4
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 Mar 05. EM | What’s In the Price.
Green (Red) means MS expects a lower (higher) rate than the market at the next meeting.
BRICs Policy Rates
G4 Policy Rates
US
7
Japan
UK
Euro Area
Brazil
25
5
20
4
Russia
India
15
3
10
2
5
1
0
2002
China
30
6
0
2002
2004
2006
2008
2010
2012
2004
2006
2008
2010
2012
2014
2014
Source: Morgan Stanley Research, Haver Analytics
Source: Morgan Stanley Research, Haver Analytics
24
MORGAN STANLEY RESEARCH
March 5, 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 F orecast
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 F orecast
MS F orecast
35
1150
34
1.35
1100
33
1.30
1050
Jun-14
Jun-15
29
Jun-13
Jun-14
Jun-15
4.25
USD/ZAR
14.5
29
13.5
Jun-14
Jun-15
12.5
28
11.5
27
4.05
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 F orecast
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
EUR/CZK
30
MS F orecast
4.15
USD/BRL
3.30
28
Jun-12
MS F orecast
4.35
3.75
Jun-12
MS F orecast
EURCZK
MS F orecast
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 F orecast
USDKRW
USD/KRW
1250
1.40
1.20
Jun-12
Jun-13
AUDUSD
MS F orecast
USDSGD
USD/SGD
1.45
Jun-14
MS F orecast
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 F orecast
MS F orecast
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.
25
MORGAN STANLEY RESEARCH
March 5, 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
1.10
120
1.52
0.97
8.36
7.74
1.25
0.78
0.75
132
0.72
1.07
9.22
8.54
6.27
7.76
12990
62.2
1101
3.65
44.1
1.37
31.5
32.4
3.0
15.08
8.7
6.3
620
2543
3.1
11.8
2.59
3.99
60.6
4.19
27.8
314
4.41
94.83
102.31
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
-9.2
5.1
6.2
12.3
6.3
-6.8
-8.5
-1.2
5.7
0.0
3.3
9.4
-1.5
0.5
1.5
-0.8
8.8
5.8
3.5
0.7
1.7
3.6
-1.4
4.1
5.7
-60.0
4.8
4.0
0.0
2.9
-1.2
3.0
7.5
4.8
1.1
5.0
2.3
5.5
-2.1
-5.3
6.4
-9.3
6.6
8.8
13.9
8.0
-10.1
-10.8
0.7
4.4
0.9
3.0
7.8
-4.2
0.6
-4.9
-4.2
10.8
2.9
5.5
1.6
4.0
4.3
-11.0
-2.1
7.9
122.5
3.7
-0.5
-0.7
-0.4
-9.0
4.4
5.9
3.7
2.1
5.4
0.2
7.5
-1.0
Source: Morgan Stanley Research
26
MORGAN STANLEY RESEARCH
March 5, 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.
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MORGAN STANLEY RESEARCH
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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.
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MORGAN STANLEY RESEARCH
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030515 jf/cc/sm/dz
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