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MORGAN STANLEY RESEARCH
Global Currency Research Team
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March 12, 2015
Currencies
Global
FX Pulse
Patient on the Dollar
Dialing Back Some Exposure. After posting very large
gains at the start of the month, we think the USD rally may
see a temporary respite with recent growth numbers
disappointing expectations. Specifically, the latest data on
domestic demand suggest that the US consumer is
saving, rather than spending, income gains from lower oil
prices – weighing on estimates for Q1 growth. As such,
with markets pushing back expectations on the timing of
the first rate hike, we pare back half of our USD longs this
week, focusing on the high-yielders.
Remaining Short AXJ. Despite paring back USD longs
against high-beta FX, we remain committed to our AXJ
shorts. Indeed, the Asian REERs have continued to move
significantly higher over the past few months with the EUR
depreciation seen year-to-date. We believe this trend is
unsustainable, given the net tightening it represents in an
environment of generally slowing growth in the region,
driven by China. In line with this thinking, AXJ central
banks in the region have acted, with the BoT and BoK
cutting interest rates this week. We remain long USD/THB
and have added a long JPY/KRW position to our portfolio.
Wages in Japan, a key focus for Abenomics, have begun
to turn higher. This suggests less need for a significantly
weaker JPY to reflate the economy.
Hitting Targets. We reached targets on both our short
SGD/INR and long USD/CHF trades and have thus taken
profits. Elsewhere, we close our long USD exposure
against high-beta AUD, and tighten the stop on long
USD/TRY. We continue to use EUR as a funder, and
short it against INR and SEK. We favor long CLP/COP.
This Week’s Edition
We look at USD performance leading up to and following
the first rate hike in previous tightening cycles. History
suggests USD appreciation in the six months before the
first hike, and depreciation in the subsequent six months.
While we may see a similar pattern this time around,
extraordinarily low rates elsewhere in the globe and the
increasing rotation of funding away from the dollar suggest
USD may continue to rally, even post tightening.
Closed Trades
Short SGD/INR
Long USD/CHF
Short AUD/USD
Active Orders
Long USD/THB
Long USD/PEN
Short EUR/INR
Long USD/TRY
Short EUR/SEK
Long USD/ILS
Long CLP/COP
Limit Orders
Buy JPY/KRW
Options Trades
Long EUR Put/USD Call
Short EUR Put/USD Call
Entry
Stop
Target
Closed at 45.00 on Mar 9, 2015
Closed at 1.00 on Mar 10, 2015
Close at NY Close Mar 12, 2015
Entry
Stop
32.78
32.00
3.0690
3.0690
71.05
68.50
2.46
2.55
9.20
9.20
3.99
3.90
4.10
4.02
Entry
Stop
Enter at NY Close Mar 12, 2015
Entry Date Expiry Date
05-Feb-15
07-May-15
05-Feb-15
07-May-15
Target
35.00
3.2600
64.00
2.75
8.88
4.25
4.28
Target
Strike
1.1250
1.0850
See page 11 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
Fed Tightening Cycles and USD
P7
Technical Chart of the Week – EUR/USD
P10
Strategic FX Portfolio Trade Recommendations
P11
G10 & EM Currency Summary
P15
Global Event Risk Calendar
P17
FX Volatility/Carry Grids, Tactical Indicators
P19
MS FX Positioning Tracker
P21
Macro Forecasts
FX Forecasts
P22
P24
For important disclosures, refer to the
Disclosures Section, located at the end of
this report.
MORGAN STANLEY RESEARCH
March 12, 2015
FX Pulse
FX Overview
Hans Redeker, Sheena Shah
 The EUR decline has become the dominant market theme
with more weakness in store…
 …even if EMU’s economy looks set to rebound.
 The ECB’s aggressive QE operation, negative net bond
issuance (after purchases) and legislative requirements have
created an environment where EUR-denominated AAA
bonds are in short supply.
The aggressive ECB stance suggests that for now the
performance of the EUR will remain data independent. One
day the ECB may tell us that the EUR has fallen enough;
however, given the degree at which EMU inflation rates have
undershot the ECB’s ‘near 2%’ target, taking unemployment
miles above NAIRU, the ECB seems to be in no rush to bring
the current EUR slide to a halt.
Exhibit 1
EUR Has Taken on the Status of a Liability Currency…
 The unsettled Greek situation means the EUR is starting to
attract a risk-discount, bringing our 0.90 EURUSD bear case
target for year-end into play.
 The weakening EUR increases deflationary pressure
elsewhere, increasing the pace of monetary easing in
lowflationary Asia.
 Japan’s wage growth has accelerated. The JPY should
maintain its position as an outperformer, suggesting JPY
crosses could fall further.
 The USD rally looks set to pause as recent US data suggest
the Fed could push back the timing of its first rate hike.
ECB Weakens the EUR
The ECB started its €60bln per month balance sheet
expansion last Monday, with purchases showing the desired
effect. EMU bond yields have declined, widening yield
differentials against the EUR and putting the currency under
selling pressure. We believe there is more to come. While real
money investors, such as insurance companies, continue to
offload euros in large quantities, the leveraged community
and non-EMU based corporates have gone into the latest
EUR decline with relatively light EUR positions.
The ECB has given the green light for the EUR to weaken, in
our view. We reach this conclusion by analyzing ECB action
and rhetoric. Combining negative deposit rates with a QE
operation undermines FX. Banks have to pay to hold deposits
with the ECB, while core EMU bond yields still trade at a
premium relative to the minus 0.2% deposit rate. This
suggests that banks are channeling funds into bonds instead
of bearing the holding cost of having deposits with the ECB.
The yield differential to the rest of the world is now
substantial, suggesting foreign asset holdings have become
an attractive alternative to holding negative yield-generating
deposits with the ECB.
.
Source: Macrobond, Morgan Stanley Research
Market participants have noticed this decisiveness. Non-EMU
based non-financial corporates have increased issuance in
EUR, but then swap the proceeds, with a tendency to convert
the EUR into hard currencies such as the USD or GBP in
order to repay USD or GBP-denominated debt.
Exhibit 2
…Dictated by Yield Differentials
Source: Macrobond, Morgan Stanley Research
Our EURUSD 1.05 year-end target has been reached early.
What was an aggressive call only a few months ago has
turned out to be far too moderate. This type of experience is
rare. It turns out that our EUR bear case scenario is coming
into play. We built this scenario around political and economic
2
MORGAN STANLEY RESEARCH
March 12, 2015
FX Pulse
risks in Greece becoming material, forcing the ECB to run a
more aggressive monetary policy approach. This scenario
suggests EURUSD falling to levels near 0.90 over the course
of this year.
Side Effects of EUR Weakness
The ECB’s autonomous EUR weakening strategy has pushed
EUR crosses sharply lower. EUR weakness has become a
global issue. While the ECB may be excused for pushing the
EUR lower – as there are almost no alternative monetary
strategies available – EUR weakness still comes with global
costs. Reflation via FX provides a globally zero-sum game.
EMU’s reflation comes at the expense of EMU’s trading
partners. The additional product that EMU should sell to
export markets, due to FX-improved competitiveness, will be
an additional product that is not sold by somebody else. Local
reflation has to translate into global reflation to make a
difference.
No Carry Yet
Often we hear that the better EMU growth outlook will lead to
spillover effects, as other economies benefit from rising EMU
demand. However, we disagree: inasmuch as EMU reflation
is driven by the FX rate, support to EMU growth will come at
the expense of EMU’s trading partners. Global versus local
reflation will make the difference between markets placing
funds into carry trades or markets maintaining their current
stance – namely to sell currencies exposed to foreign
vulnerabilities and currencies that run the risk of getting
trapped in a combination of low inflation, over-capacity and
excessive private sector debt. We think the latter will
dominate trading, keeping the carry theme focused on just a
couple of currencies including the INR. Otherwise, we stay
away from the carry theme for now.
Local versus Global Reflation
Nonetheless, the fundamentals need to be watched in order
to make judgments concerning local versus global reflation.
The US economy is inward-looking with net exports
comprising only 11% of GDP, suggesting the FX rate will limit
activity only marginally. Low funding costs and credit
availability are more important for an inward-looking economy.
Hence, US reflation may be slowed down, but not derailed by
the higher USD. Naturally, the US will provide demand for the
global economy. The point we make here concerns emerging
markets, in particular AxJ, and their ability to reflate in an
environment of EUR weakness and USD strength.
Exhibit 3 differentiates countries experiencing a tradeweighted FX appreciation from economic areas where the real
effective exchange rate has depreciated. China leads the first
group, while EMU leads the latter. Chinese data have
remained weak while EMU’s data have improved. This finding
argues that there is local reflation in EMU. Global reflation has
remained non-existent for now. For us to become more
constructive, we would need to see countries with currency
appreciation reporting better data. There will be a lag before
the effects of recent FX moves show up in economic data.
Therefore Exhibit 3 is not yet conclusive. However our view
regarding this subject is clear. For reflation to become global,
it is mainly Asian data that will have to improve.
Exhibit 3
TWI Changes and PMIs
USD
CNY
INR
GBP
KRW
CHF
TRY
ZAR
NZD
ILS
AUD
IDR
HUF
PLN
CAD
CZK
SEK
JPY
EUR
MXN
NOK
BRL
RUB
TWI
(YoY)
13%
12%
10%
9%
6%
3%
3%
1%
-3%
-3%
-3%
-4%
-4%
-4%
-5%
-5%
-5%
-7%
-8%
-10%
-12%
-14%
-31%
PMI 6m
change
-3.20
0.50
0.20
2.70
2.30
-4.20
-0.80
-0.80
-7.80
3.40
-1.06
-3.20
2.20
5.60
-8.90
0.00
-0.10
-0.10
0.70
1.80
1.70
0.30
-0.70
PMI
today
52.9
50.7
51.2
54.1
51.1
47.3
49.6
49.6
50.9
53.3
45.4
47.5
54.9
55.1
49.7
55.6
53.3
51.6
51
54.4
51.2
49.6
49.7
PMI 6m
ago
56.1
50.2
51
51.4
48.8
51.5
50.4
50.4
58.7
49.9
46.5
50.7
52.7
49.5
58.6
55.6
53.4
51.7
50.3
52.6
49.5
49.3
50.4
Source: Bloomberg, Haver Analytics, Morgan Stanley Research
China Feeling the Pain
The sharply lower EUR has pushed China’s RMB TWI higher.
Financial conditions have tightened via the FX rate. China
needs monetary accommodation, but what it gets instead is
tightness via the FX rate. Lower rates and a further reduction
of minimum reserve rates looks almost warranted (See China
Economics: More easing needed despite M2 rebound, March
12, 2014), but there is still the question concerning the lower
efficiency of the credit multiplier. Our point is that an economy
running debt-financed overcapacity will respond to monetary
3
MORGAN STANLEY RESEARCH
March 12, 2015
FX Pulse
accommodation less euphorically compared to a balanced
economy.
Exhibit 5
…Not Boding Well for the AUD
AxJ Stays on the Radar
AxJ with its substantial trading relationship to China, its low
capacity utilization rates, and higher USD dependency is likely
to stay weak too. The Bank of Thailand cutting interest rates
by 25bps to 1.75% this week, citing low nominal GDP growth
and stability risks associated with EMU’s QE program,
indicates that EMU has not only exported deflation via its
weak EUR but, as well, monetary accommodation. The
weaker the EUR becomes, the bigger these pressures. In
many cases, EUR crosses have reached levels that put local
economies under increasing competitive pressure. We remind
ourselves about observations made when the JPY declined
by 45% over the past couple years. Initially, AxJ currencies
stayed stable as the JPY was seen correcting its
‘overvaluation’. However, in the later stage of the JPY move,
AxJ moved lower along with the JPY. We reckon that further
EUR weakness will now lead to a similar exchange rate
reaction among countries directly or indirectly competing with
EMU. Consequently, the USD rally is likely to broaden out
from here. We see three risks to our view. First, the ECB
stops ‘banging the table’ for further EUR weakness; second,
local reflation turns into global reflation, and third, the US
economy shows weaker data. None of these risks seem
significant to us right now, although we keep a close eye
especially on the third one.
Exhibit 4
China’s Financial Conditions Have Tightened…
Source: Bloomberg, Haver Analytics, Morgan Stanley Research
US Bond Yields and FX
The US bond market provides a benchmark for other
economies, with this being especially true for USD- or quasiUSD-pegged environments. The wide spread between
nominal US yields and the nominal GDP expansion rate
suggests that bond-market-related monetary accommodation
has become significant. There is little doubt that the US
economy can withstand higher funding costs. The question,
however, is what would the impact of higher US funding costs
be for the rest of the world? Will higher US bond yields
introduce a dose of volatility into international markets,
increasing the quantity of debt-related inflows into the US,
thus pushing yields back down again? Recent market activity
suggests that the answer to both questions is that the sharp
rise in debt in many non-US economies has increased funding
cost sensitivities, leading to higher local savings via balance
sheet consolidation, which, in the absence of local investment
opportunities, lead to capital outflows and subsequent inflows
into the US bond market. Against this background, we think
US bond yields may find it difficult to work their way higher.
Source: Bloomberg, Haver Analytics, Morgan Stanley Research
4
MORGAN STANLEY RESEARCH
March 12, 2015
FX Pulse
Exhibit 6
Global Debt Increases Show Divergence…
400%
350%
% change in total debt since 2007
300%
250%
200%
150%
Secondly, 10-year JGB yields have shot up from the 0.19%
January low, reaching 0.45% post-the non-farm payrolls print.
Japan’s wages picking up should increase bond yields further,
increasing the relative attractiveness of JPY-denominated
holdings. Exhibit 8 compares USDJPY relative to US bond
yields. Above, we explained why US bond yields should only
increase gradually. Currently, USDJPY trades too high
relative to US bond yields.
Third, the bulk of Japan’s portfolio adjustments into higheryielding asset classes have been completed. While Japan will
still report outflows, we expect the pace of the outflows to
decline, which would be JPY-supportive.
100%
50%
0%
Exhibit 8
USD/JPY Trading Higher Relative to US Yields
Source: Haver Analytics, Morgan Stanley Research
Exhibit 7
… Especially So in the Private Sector
500%
450%
400%
350%
300%
250%
200%
150%
100%
50%
0%
% change in debt levels since 2007
EM
EM
US
Total
US
Private Sector
Source: Haver Analytics, Morgan Stanley Research
Source: Macrobond, Morgan Stanley Research
Exhibit 9
Flows into Local Japanese Assets
We Are Not Bearish on JPY
Japan’s wage growth, a key variable for the success of
‘Abenomics’, seems to be picking up (see Japan Economics:
J-Insight: Faster: Cyclical and Structural Reasons for the
Acceleration of Wages (12 Mar 2015)). Higher wages will not
only lend support to domestic demand conditions, but will also
allow inflation to reach the BoJ’s 2% target. Importing inflation
via JPY weakness would no longer be required. There are
important conclusions to draw from this.
First, Japan’s equity market, which in the past required the
help of a weak JPY to perform, should find its currently-tight
negative correlation with the JPY easing. Foreign equityrelated inflows have been mostly currency-hedged, but should
the negative correlation between stocks and the JPY ease,
FX-hedged equity investors may reduce currently high FX
hedging ratios, which could spark a wave of JPY buying.
Source: Haver Analytics, Morgan Stanley Research
5
MORGAN STANLEY RESEARCH
March 12, 2015
FX Pulse
Our Trading Recommendations
Some of our bullish USD positions have hit target. While we
remain committed to our long USD positions versus low-beta
FX, we pare back longs against the high-yielders. Thus we
take off our USD long against the AUD and also tighten our
stop on USDTRY to lock in profit. The weak US retail sales
report has put our US GDP tracker down to 1.2% for 1Q,
significantly lower than the 3% levels it was at earlier this
year. The USD rally may pause for now. A similar pattern
emerged in early February, then lasting for three weeks. The
Fed statement due on Wednesday is likely to refer to
international developments reducing US rate hike
expectations, which could put the USD under further
corrective downward pressure tactically.
Accordingly, we look into non-USD related trades. An
interesting opportunity emerges in the JPY. The consensus is
JPY bearish. We are not. Our JPY optimism is fed by Japan’s
wage data suggesting that inflation no longer requires the
help of JPY weakness. We like JPYKRW longs benefiting
from rate and yield differentials, working more in favor of the
JPY. The BoK has cut rates as its economy has weakened
and inflation heads lower (Economics & Strategy Insights:
Korea: Household Debt Concerns Could Mean More FX
Policy, February 9, 2014). The risk to this trade is USDJPY
heading higher with US yields. The FOMC meeting will be key
this coming week. See Strategic FX Pulse Recommendations,
page 11.
6
MORGAN STANLEY RESEARCH
March 12, 2015
FX Pulse
Fed Tightening Cycles and USD
Evan Brown, Charles Rubenfeld
 The USD rally to date has more to do with developments
outside than inside the US. This will likely shift as the Fed
moves toward the exit.
 In previous Fed tightening cycles, USD appreciated in the six
months leading up to the first hike and depreciated in the
following six months.
 Even in the 1994-1995 tightening cycle, when the market
was forced to aggressively price in a more hawkish Fed,
USD sold off.
 In line with history we expect further USD strength in the lead
up to the first Fed hike. But investors should be prepared for
a downward correction after the Fed starts tightening,
especially given USD’s aggressive rally to date.
 Still, USD could continue to rally even after the Fed hikes as
low interest rates elsewhere influence funding and hedging
decisions.
the curve may rise quickly (US Interest Rate Strategist: Get
Ready to Rumble, March 5, 2015).
Exhibit 1
22% USD Move Since July More About RoW than
US
2
1.9
1.8
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1
Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15
US 5y Swap Rate
Average G10 ex-US 5y Swap Rate
Source: Bloomberg, Morgan Stanley Research
Exhibit 2
Pricing Out Fed Hikes Didn’t Disrupt USD Trend
The USD Bull Market: (Not) Born in the USA
6
One could argue that much of the USD’s acceleration since
July 2014 has been more about developments abroad than
those in the US. Since July we’ve had several European
central banks cut rates into negative territory, the BoJ expand
asset purchases and encourage outflows from its pension
funds, and the ECB finally launch a quantitative easing
program. Just in the first few months of this year, 20 major
central banks have eased policy.
90
In contrast, the Fed’s movement toward rate normalization
has been very gradual. Take the 5-year swap rate in the US
versus the average ex-US G10 rate since USD TWI began its
22% move, for example (Exhibit 1). While volatile, the US
rate is now more or less where it was at the start of the USD
TWI move while average rates outside of the US fell 65 bps.
Note, too, that the USD uptrend remained intact even during
periods when the market was pricing out Fed rate hikes
(Exhibit 2).
70
13
Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15
Trade Weighted USD Index
M1KE (RHS)
But the epicenter of the USD’s strength may be shifting.
st
Morgan Stanley’s M1KE (Months to 1 Hike) indicator is now
just above 6 months, implying a first full 25 bps tightening in
September. And the pace of tightening priced in remains well
below the FOMC’s own projections (the dots). Should the
market move closer to the Fed’s own forecasts, yields across
7
8
85
9
80
10
11
75
12
Source: Bloomberg, Morgan Stanley Research
With the ECB having fired its bullets, the BoJ in wait-and-see
mode and several central banks pressing pause in their
easing cycles (BoC, NBP), USD direction will increasingly be
‘made in America.’ Our US Economics team maintains an outof-consensus call for Fed tightening only in 1Q 2016, but
notes that a pickup in wage growth, an earlier bottoming in
core PCE inflation or change in Fed rhetoric will inform the
forecast (see US Economics: The Fed Call and Data
Dependency, March 3, 2015). Whether a year or three
months from now, the Fed is highly likely to begin a tightening
cycle, the time and pacing of which will have meaningful
implications for USD. As such we take a look at previous
7
MORGAN STANLEY RESEARCH
March 12, 2015
FX Pulse
tightening cycles and USD performance before, during and
after.
What Happens When the Fed Hikes?
Exhibits 3 and 4 chart the trade-weighted USD during the last
three tightening cycles: 1994-1995, 1999-2000 and 20042006. In all three instances USD appreciated in the months
leading up to the first hike, but depreciated in the months
afterwards even as the Fed continued tightening. Six months
before the first hike, TWI rose by an average of 4%. In the
following six months, USD depreciated by an average of 5%.
Exhibit 3
exporting capital abroad in search of higher yielding
opportunities.
In contrast to the 2004-2006 tightening cycle, the one in 19992000 came during a multi-year secular USD bull market. And
yet USD still sold off in the initial months after the first hike.
1999-2000’s tightening cycle was similar to that in 2004-2006
in that the timing and speed of hikes held few surprises. In
the first few months after the initial 1999 hike, the ECB
tightened more aggressively than the Fed, temporarily
compressing US-European rate spreads. Once the ECB was
done, USD regained momentum.
But what if the first rate hike was a hawkish surprise? That
was the case in 1994, which marked the first time the Fed
released a statement communicating action after an FOMC
meeting. Two-year yields shot up to price in much tighter
policy than was previously anticipated. But even so, the USD
depreciated materially after the first hike and throughout the
tightening process, In fact, USD had begun to decline a few
weeks ahead of tightening.
USD TWI During Fed Hiking Cycles
USD TWI (Hiking Cycles Shaded)
115
110
105
100
95
90
Exhibit 5
85
1994 the Lone Hawkish Surprise
80
75
US 2 Yr Change From 1st Hike (bps)
70
400
65
92
94
96
98
00
02
04
06
08
10
12
14
Source: Bloomberg, Morgan Stanley Research, Federal Reserve Bank. We use the Federal
Reserve’s Major Currency Nominal Trade Weighted Index
300
200
100
Exhibit 4
USD Rises into First Hike, Sells off After
USD TWI (Rebased, 1st Hike=100)
104
0
-100
-200
102
-30
-20
94 Cycle
100
-10
0
98 Cycle
10
20
04 Cycle
30
40
50
Weeks from 1st Hike
98
Source: Bloomberg, Morgan Stanley Research
96
USD’s depreciation during the 1994-1995 tightening cycle is
surprising given the sharp increase in yields. One explanation
is the US starting out with low yields compared to the rest of
G10 at the beginning of the tightening cycle. As such, funding
in USD remained attractive even as the Fed began removing
accommodation. Also, destabilizing fixed income volatility
may have made US asset markets less attractive, keeping
USD risk-seeking inflows limited. Nevertheless, the 1994
experience is noteworthy for today, especially as some
market participants anticipate a hawkish repricing of rate
expectations in line with the Fed’s own projections. If 1994 is
any guide, such a rise in yields will not necessarily propel the
USD even higher, as some expect.
94
92
90
-30
-20
-10
94 Cycle
04 Cycle
0
10
20
98 Cycle
Average Cycle
30
40
50
Weeks from 1st Hike
Source: Bloomberg, Morgan Stanley Research
The USD’s post-hike decline made logical sense in the 20042006 cycle, given the low starting point for the Fed Funds rate
(1%) and very gradual/transparent nature of tightening.
Moreover, the tightening cycle arrived in the middle of a
structural bearish USD trend that reflected US investors
8
MORGAN STANLEY RESEARCH
March 12, 2015
FX Pulse
Exhibit 6
Nominal Interest Rate Differentials Before and After
the First Hike
US 2Yr Swap - Avg G4 Ex-US 2Yr Swap
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-30
-20
-10
0
10
94 Cycle
98 Cycle
20
04 Cycle
30
40
50
Weeks from 1st Hike
Source: Bloomberg, Morgan Stanley Research, Germany 2yr Swap used for pre-1999 Euro
Swap
Lessons for Today
If history repeats itself, we should expect USD to continue
appreciating ahead of the first rate hike. In true “buy the
rumor, sell the fact” fashion, investors should then be cautious
once the Fed starts tightening in case there is a downward
correction in USD. Indeed, the ferocity of the USD’s move to
date may increase the likelihood of a post-hike correction.
While not our base case, it’s possible that the first Fed hike
could even mark the beginning of the end for this USD Super
Cycle (The USD Super Cycle, January 22, 2015).
Still, there are reasons to think USD can keep going even
after the Fed pulls the trigger. Today, all of the Fed’s G4
peers are operating at near-zero interest rates. The ECB,
SNB, Riksbank and DNB have even moved interest rates into
negative territory. We have argued that this environment is
leading to a shift in funding interest away from USD and into
other currencies, providing structural support for the
greenback. Super-low interest rates and increased use of
derivatives are also encouraging FX hedging of non-US
securities at an unprecedented scale. This neutralizes the FX
impact of risk-seeking inflows into these countries.
All told, we think there are enough structural factors backing
the USD bull cycle over our forecast horizon (through end2016). Large fixed income inflows from the private and official
sector offer ongoing support. Increased funding in and
hedging of foreign currencies will cushion USD downside.
Valuation-wise, USD is not yet stretched on a real effective
basis. We advise our readers to expect further USD strength
going into the first rate hike, but exercise somewhat more
caution thereafter.
9
MORGAN STANLEY RESEARCH
March 12, 2015
FX Pulse
Technical Chart of the Week – EUR/USD
Sheena Shah
Long term EUR/USD Chart
1.70
1.60
1.50
1.40
1.30
1.20
1.1640
1.10
1.0794
1.00
0.9613
0.90
0.8565
0.80
0.8231
100 00RSI 01
02
03
04
05
06
1.6038
B
X
B
A 1.1877
07
08
07
08
09
10
C
A
11
12
1.2043
1.1098
13
14
15
EURUSD has accelerated
lower, moving just below the
bottom end of the recent trend
channel at 1.0630. Currently
in a downward C-wave,
whose substructure below
shows that the wave is
incomplete, supporting a
bearish view. The next lows to
watch out for are 1.0794
(Sept-2003), 0.9613 (Sept2002) and then 0.8565 (Jan2002).
0
00
01
02
03
04
05
06
09
10
11
12
13
14
15
2-year EUR/USD Chart
1.45
1.40
1.35
1.30
1.25
1.20
1.15
1.10
1.05
1.00
RSI
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
15
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
1.3993
B
2
1
4 1.1534
1.1115
3
The break below 1.0630
opened the way to further
downside for EURUSD. The
outlook remains bearish but
due to the recent rapid fall
there is a risk of a mild
rebound. We expect
th
completion of the 5 wave
around parity.
90-day EUR/USD Chart
rd
1.30
1.25
1.20
1
1.15
1
4 1.1534
2 1.1380
1
1.1098
1
1.10
1
1.0495
1.05
3
1
1.00
1
1RSI 55 109 163 217 271 325 379 433 487 541 595 649 703 757 811 865 919 973 1027
100
1
1
Completing a 3 sub-wave
with a low of 1.0495, there is
room for EURUSD to
technically rebound towards
the 1.0850/1.0900 area, which
is between 38.2% and 50%
retracement levels. We would
use this rebound as a selling
opportunity, targeting parity.
We place stops around
1.1100, since a move above
here could open the way to
crossing the 2-wave top at
1.1380.
0
1
00000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000
10 Nov 14 27 Nov 14 15 Dec 14 31 Dec 14
18 Jan 15
04 Feb 15
20 Feb 15
10 Mar
15
x 10000
For a description of the Elliott Wave Theory see: Trading Technicals – The Elliott Wave Method, January 10, 2014.
Source: Bloomberg, Morgan Stanley Research
10
MORGAN STANLEY RESEARCH
March 12, 2015
FX Pulse
Strategic FX Portfolio Trade Recommendations
Evan Brown, Vandit D. Shah
Enter: NY Close Mar 12, 2015; Target: 10.60; Stop: 9.00
Our economists expect wages to rise in Japan with the cyclical
recovery well underway in their view (see Japan Economics: JLimit Order:
Buy
JPY/KRW
05-Mar-15
Korea Fighting Disinflationary Forces
Insight: Faster: Cyclical and Structural Reasons for the Acceleration
of Wages (12 Mar 2015)). Real exports have begun to pick up as well
with the historically-weak JPY REER boosting competitiveness. On
the other hand, the BoK cut rates this week as Korea spirals further
into deflation. Weakness in the EUR has also resulted in further
unwanted KRW REER appreciation dampening the macro outlook. As
such, we recommend a long JPY/KRW trade, with a key risk to this
trade being a spike in US yields which could drag USD/JPY with it.
Enter: 9.1992; Target: 8.880; Stop: 9.2000
Strong German Economy Lifts Sweden
13
From the perspective of Germany, the ECB’s 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, CPI and IP all surprising to the upside.
However, we would highlight the risk of Swedish policymakers turning
hawkish on currency strength and possibly intervening.
12
05-Mar-15
Enter: 4.10; Target: 4.28; Stop: 4.02
Growth Stronger in Chile than Colombia
Hold:
Long
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 .
For more, see EM FX Trades: Buy CLP/COP (09 Mar 2015).
05-Mar-15
Hold:
Long
USD/ILS
12-Feb-15
Hold:
Short
EUR/INR
Enter: 3.99; Target: 4.25; Stop: 3.90
10
9
8
7
6
20%
100%
CLP-COP Manufacturing Growth (YoY)
CLP-COP Export Growth (YoY, RHS)
15%
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
2003
-100%
2002
-80%
-20%
2001
-15%
2000
Hold:
Short
EUR/SEK
German Unemployment Rate
11
BoI Steps Up Interventions
Recent data show 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 in 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.
Enter: 71.05; Target: 64.00; Stop: 68.50
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, with chatter
on raising FDI limits in the insurance sector further supportive. 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.
11
MORGAN STANLEY RESEARCH
March 12, 2015
FX Pulse
23-Feb-15
Hold:
Long
USD/TRY
12-Feb-15
Hold:
Long
USD/PEN
Enter: 2.4600; Target: 2.7500; Stop: 2.5500
Enter: 3.0690; Target: 3.2600; Stop: 3.0690
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 recently. 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. For
more, see Video | LatAm FX: Not There Yet (12 Mar 2015).
20-Feb-15
Enter: 0.9400; Hit Target: 1.0000
Closed:
Long
USD/CHF
While we hit target on our long USD/CHF trade, we will look to reenter
at better levels. 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
further 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 – hence, we will look to buy dips.
29-Jan-15
Enter: 32.78; Target: 35.00; Stop: 32.00
Hold:
Long
USD/THB
The battle against lowflation fought by global central banks is in full
swing with the BoT’s rate cut this week adding to easing measures
undertaken by 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 one more rate cut from BoT, 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 monetary action. For more, see EM FX Trades:
Long USD/THB (29 Jan 2015).
8-Jan-15
Enter: 46.74; Hit Target: 45.00
Hit Target:
Short
SGD/INR
Past CBT Easing Cycles
We tighten the stop on our long USD/TRY trade heading into the
FOMC meeting next week. Indeed, we have broadly pared back risk
against high-yielders tactically in the current environment. In the
medium-term, however, risks surrounding US yields and CBT monetary
policy keep us bullish on the pair. 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.
Switzerland Risks Falling into Deflation
THB REER Has Appreciated Sharply
Change in C/A Balance Favors India
While we hit our target on our short SGD/INR trade, we will look to
reenter at better levels as we continue to believe in the fundamental
story. 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.
12
MORGAN STANLEY RESEARCH
March 12, 2015
FX Pulse
12-Feb-15
Closed:
Short
AUD/USD
5-Feb-15
Hold:
EUR/USD put
spread
Enter: 0.7735; Close at NY Close Mar 12, 2015
AUD REER Still Overvalued
While we maintain our structurally bearish view on AUD, we close this
trade for now given the absence of a near-term catalyst. Indeed, we
pare back our USD longs for now against high-beta FX heading into the
FOMC meeting waiting for better levels to sell rallies in the pair. In the
medium-term, the negative pass-through to national income,
investment and labour markets from the decline in Australia’s terms-oftrade appears substantial, with the RBA downgrading 2015 growth and
inflation forecasts. 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.
Buying a 3m 1.1250/1.0850 put spread
Greece: Key Maturities in July &August
Our EURUSD put spread is well in the money and we will hold to
maturity.
Source for all charts: Bloomberg, Haver Analytics, Macrobond, Reuters EcoWin, Morgan Stanley Research
13
MORGAN STANLEY RESEARCH
March 12, 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
Short SGD/INR
$10.0mn
9.6%
08-Jan-15
46.74 Closed at 45.00 on Mar 9, 2015
$374.2k $133.8k
$508.0k
Long USD/CHF
$10.0mn
9.6%
20-Feb-15
0.9400 Closed at 1.00 on Mar 10, 2015
$600.0k
$3.2k
$603.2k
Short AUD/USD
$10.0mn
9.6%
12-Feb-15
0.7735 Close at NY Close Mar 12, 2015
$56.9k
-$17.2k
$39.7k
Long USD/THB
$10.0mn
9.6%
29-Jan-15
32.78
32.85
32.00
35.00
$21.6k
-$35.7k
-$14.1k
Long USD/PEN
$10.0mn
9.6%
12-Feb-15
3.0690
3.0930
3.0690
3.2600
$92.0k
-$49.8k
$42.2k
Short EUR/INR
$10.0mn
9.6%
12-Feb-15
71.05
66.48
68.50
64.00
$676.4k
$63.0k
$739.4k
Long USD/TRY
$10.0mn
9.6%
23-Feb-15
2.4600
2.6004
2.5500
2.7500
$515.1k
-$50.5k
$464.6k
Short EUR/SEK
$10.0mn
9.6%
05-Mar-15
9.1992
9.1364
9.2000
8.8800
$64.0k
$0.0k
$63.9k
Long USD/ILS
$10.0mn
9.6%
05-Mar-15
3.99
4.00
3.90
4.25
$30.5k
$0.2k
$30.6k
Long CLP/COP
$10.0mn
9.6%
05-Mar-15
4.10
4.13
4.02
4.28
$57.2k
-$2.2k
$54.9k
9.29
9.00
10.60
Active Trades
Lim it Trades
Buy JPY/KRW
$10.0mn
Enter at NY Close Mar 12, 2015
Cash
$22.6mn
21.6%
Portfolio Mark to Market
$104.4mn
Source: Morgan Stanley Research
Notes: (1) Stops are based on the WMR fixing. (2) The portfolio represents hypothetical, not actual, investments. For more details regarding calculations, please see “Reading FX Tactical Trade
Performance” at the back of FX Pulse. Our FX Trade Data Performance Package (12 Feb 2015) contains complete performance statistics. (3) Reported returns are unleveraged. Reported returns do
not take into account transaction fees and other costs; past performance is no guarantee of future results. (4) In the case that trade allocations are increased, entry levels are a weighted average.
* Global Risk Demand Index – US Pat. No. 7,617,143. We updated our methodology for our portfolio in 2011 (FX Pulse: Watching Europe, October 13, 2011).
Simulated Managed Account Monthly Gross Performance - %
Year
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Year return
2007
-0.75
-0.77
-1.08
0.94
0.36
-2.02
1.07
2.75
1.26
0.45
1.16
0.18
3.52%
2008
1.07
2.25
2.72
-1.41
-0.53
1.28
-0.17
-0.24
-0.86
3.12
0.62
0.87
8.96%
2009
0.74
-0.97
-0.15
-1.09
0.50
-0.87
0.30
0.22
2.00
0.77
1.27
0.55
3.27%
2010
-0.01
-0.27
1.71
1.13
1.39
-0.86
-2.36
0.95
0.67
-0.30
0.13
0.66
2.80%
2011
-1.20
0.29
-1.71
0.51
-1.11
-0.33
0.84
-1.02
0.50
-1.03
-0.18
0.44
-3.97%
2012
0.34
0.46
-0.42
0.52
1.78
-0.43
0.39
0.56
0.43
0.53
0.96
0.47
5.72%
2013
-0.23
-0.66
0.08
0.10
0.26
0.05
-0.71
-0.13
-0.62
0.23
1.17
-0.27
-0.75%
2014
1.09
-0.67
-0.54
-0.02
-0.20
-0.26
1.20
0.30
1.23
0.35
-0.30
0.37
2.54%
2015
2.21
0.09
1.74
4.04%
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%
1.0626
1.0626
10.90%
11.75%
6.33%
3.23%
P&L
$224.0k
$476.5k
-$252.5k
14
MORGAN STANLEY RESEARCH
March 12, 2015
FX Pulse
Click here for interactive currency
pages:
G10 Currency Summary
Dara Blume and Sheena Shah
USD
Dollar Data Dependence
10.5%
We expect USD will continue to trend stronger but recognize that outside of payrolls, data has disappointed somewhat recently.
Retail sales were softer than expected. Our Q1 GDP forecast has been consistently revised lower over the past six weeks,
and now stands at 1.2%. Given the large move in USD year to date, this creates scope for some retracement, but given the
longer-term growth outlook, doesn’t change our medium-term view.
EUR
Remain Bearish
-13.0%
Bullish
Bearish
Watch: PPI, Industrial Production, TIC, Housing Starts, FOMC
Watch: ZEW, CPI (F), Trade Balance, Current Account
The start of the ECB’s QE has sent both core and peripheral bond yields tumbling, taking EURUSD with them. We maintain our
bearish outlook, and we would use rebounds as selling opportunities. The unsettled Greek situation means the EUR is starting
to attract a risk discount, bringing our 0.90 EURUSD bear case target for year-end into focus. We believe that the leverage
community and non-EMU corporates have relatively light EUR positions, opening the way for further downside.
JPY
A Brighter Picture
1.8%
JPY has been the best performing currency on the crosses over the last week, and we expect this could continue. The
Japanese economy is starting to show signs of reflation, suggesting BoJ action could be limited. The latest GDP print was
weak, but largely due to inventories, so we would not read too much into this print. GPIF reallocation has largely happened, so
outflows going forward could be lower. We like buying JPY on crosses.
Neutral
Watch: Industrial Production, Trade,
GBP
GBP – Support on Crosses
- 4.3%
EURGBP has been reaching new lows, and we expect this trend to continue, with GBP receiving support on the crosses.
However, we remain bearish against the USD. The data has started to turn around, with manufacturing production being weak
and the retail sector feeling the pinch. Political risks will remain until and after the May election, which will likely keep GBPUSD
under selling pressure. We target 1.47 initially in short positions and will be watching the BoE’s release of their minutes.
CHF
USDCHF Steams Ahead
2.3%
We expect CHF to continue its underperformance. The crossing of 1.00 in USDCHF was important in keeping the
uptrend in the currency pair. Inflation data was weak, as expected, so the SNB meeting will be important. We will be
watching whether the SNB provides any guidance on their preferred EURCHF level. The CHF will be weak, if the bank
revises their inflation forecasts lower. Should EUR continue to weaken, we expect the CHF to follow.
CAD
A Shift in Tone
Neutral
Watch: Employment, Manufacturing Sales, CPI, Retail Sales
We remain bearish on CAD over the medium term as we believe there is room for further weakness to improve
competitiveness. That said, with the central bank taking near-term cuts off the table, and some signs of USD
retracement, we would wait for dips to enter long USDCAD positions at better levels. This week, economic data in
Canada will be watched closely given the latest BoC shift.
Watching RBA Minutes
Bearish
Watch: RBA Minutes, Leading Index
9.0%
AUD
Neutral
Bearish
Watch: Employment report, BoE Minutes, PSNB
Watch: PPI, Retail Sales, Trade Balance, SNB
- 6.4%
We expect AUD to weaken over the medium term and stick to our bearish view, but recognize that if USD strength
experiences some relief, there could be scope for a correction in high beta currencies such as AUD. That said, the RBA
minutes could strike a more dovish tone, and markets will be watching closely to see if the 50bp priced in over the next
year are appropriate.
NZD
Sell on Rallies
- 5.3%
The RBNZ left rates unchanged but lowered its path for 90-day interest rates, suggesting that the central bank could shift
toward a more dovish bias. The central bank also pushed back on price action in the NZD on a TWI basis, suggesting
that policymakers are watching the exchange rate closely. We think NZDUSD is a sell on rallies, though acknowledge
that with US data soft, the recent rally could have further legs, so patience is key.
SEK
Gaining Against EUR
12.2%
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. Inflation may have
started to bottom out in Sweden, supporting the SEK. We believe the central bank would object to excessive currency
strength, but see scope for EURSEK to head toward the 9.00-9.10 range.
Watching the Norges Bank
Bearish
Watch: Norges Bank, Unemployment rate (AKU), Retail Sales
NOK
7.6%
Neutral
Neutral
Watch: Current Account, GDP, Consumer Confidence
Watch: Economic Tendency Survey, Trade Balance, Retail Sales
Weakness in oil markets has caused the NOK to remain one of the weakest currencies in the G10, even with the rapid EUR
decline. The central bank is expected to cut rates this week, which is likely to keep the NOK weak against the USD, but
EURNOK is still a tricky trade. There has been a 7% decline in EURNOK since Dec, so any mention by the Norges Bank of
needing a weaker currency to rebalance the economy is likely to weaken the NOK on the day.
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
15
MORGAN STANLEY RESEARCH
March 12, 2015
FX Pulse
EM Currency Summary
Jessica Liang (AXJ), Meena Bassily (CEEMEA), Felipe Hernandez and Dara Blume (LatAm)
CNY
Neutral
INR
Neutral
IDR
Bearish
0.3%
Despite the domestic growth slowdown, we expect the PBoC to manage excess volatility in RMB. Looking ahead,
we anticipate a stable path for CNY.
0.5%
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.
A dovish BI has triggered further IDR weakness. We remain structurally bearish on IDR. We think that REER
adjustments and sustainability of bond inflows will be the key to the outlook for IDR in 2015. For Indonesia to
regain competitiveness, REER adjustment will be needed.
Declining inflation, weak exports and sluggish domestic growth had BoK cutting rates to an all-time low of 1.75%.
Rising volatility and expectation of Fed tightening will likely cap foreign bond inflows, while slowing growth will
keep equity inflows muted. We see USD/KRW climbing higher for the rest of the year.
We see MYR as susceptible to continued low commodity prices and see the potential for portfolio investment
outflows in the event of carry trade unwinds. However, given the risk of bond issuance repatriation flows in the
near term, we remain neutral on MYR for now.
4.0%
3.4%
KRW Bearish
3.0%
MYR Neutral
- 0.2%
PHP
Neutral
THB
Bearish
CZK
Neutral
HUF
Bearish
ILS
Bearish
PLN
Bearish
RUB
Neutral
TRY
Bearish
ZAR
Bearish
BRL
Neutral
CLP
Neutral
COP
Bearish
0.6%
5.4%
4.9%
3.5%
5.1%
- 6.5%
3.9%
5.0%
10.3%
1.1%
9.6%
2.9%
MXN Bullish
0.4%
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.
BoT cut rates by 25bp triggering THB weakness after months of resilience. Given the sharp decline in inflation, we
see room for one more rate cut this year. Aggressive monetary easing by BoJ and ECB has caused THB REER
to appreciate to all-time highs, jeopardizing Thailand’s export competitiveness. We remain long USD/THB.
EUR/CZK continues to head lower with the EUR weakening across the board and the chances of the CNB raising
the EUR/CZK floor from 27 having come down with recent comments from the President that were opposed to
the previous devaluation of the CZK. Still, we think the floor at 27 will stay in place for a prolonged period of time.
Despite some recent improvements in performance, we believe it is still too soon to become constructive on HUF
on the back of signs of improved growth data. The main risk is related to an increase in bond market volatility
driven by Fed risks which can cause large spikes higher in EUR/HUF. We also expect further NBH easing.
The BoI has backed recent rhetoric about wanting a weaker exchange rate with both rate cuts and discretionary
interventions, which were as high as USD 800m over February. As such, we stay long USD/ILS, though expect it
may take some time to see a meaningful break above 4, which has proved to be a strong resistance.
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 about potential PLN strengthening. As such, EUR/PLN may continue to
grind lower with no expectation of dovish policy and the bar for concern about 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.
There has been an improvement in the risks surrounding monetary policy. The CBT and government officials met
and there has been a clear reduction in political commentary about monetary policy. Still, TRY faces risks from
Fed policy. As such, we stay long USD/TRY but have raised the stop to 2.55 to protect gains.
The ZAR has acted as a clear proxy to risks surrounding Fed policy and rising UST yields. Trade and
manufacturing data have remained poor in South Africa, keeping the current account deficit wide; therefore
external funding costs remain important, particularly since FDI flows have been weak in the most recent data.
We remain bearish on BRL, even after the depreciation already seen. The central bank’s decision not to roll all of
its swaps suggests it is more comfortable allowing the currency to depreciate. The REER remains overvalued,
and for competitiveness to improve, a weaker currency would help.
We believe CLP could outperform its peers in the near term, as there are signs that FX weakness is feeding
through into real economic growth. With inflation picking up, the market is now expecting a more hawkish central
bank.
We expect COP to weaken further, as Colombia needs to improve the competitiveness of its non-oil sector.
While there has been some speculation that policymakers could step in to support the currency as they did in
Mexico, officials have stated that they are happy with FX weakness.
We are cautious about Banxico’s new intervention mechanism and believe it is unlikely to prevent USDMXN from
heading higher in times of broad USD strength. Its relatively small scale will limit its effectiveness, as has been
the case in other Latin American countries recently. That said, we believe MXN could be a relative outperformer
over time.
On a REER basis, PEN looks rich relative to historical levels and lower terms of trade. Decelerating economic
activity, particularly in non-commodity tradable sectors, and eroding trade and current account results are also
consistent with other evidence that the currency needs to depreciate to help push a necessary macro rebalancing.
Charts show 1M performance against USD, as normally quoted
16
MORGAN STANLEY RESEARCH
March 12, 2015
FX Pulse
Global Event Risk Calendar
Charles Rubenfeld
Date
Day
13-Mar
Fri
15-Mar
Sun
16-Mar
Mon
17-Mar
18-Mar
19-Mar
Time
(Ldn)
Ccy
Event
Ref.
Period
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
21:30
NZD
Performance Services Index
22:30
12:30
13:00
08:00
18:45
09:00
13:00
12:30
13:15
13:15
14:00
20:00
AUD
CAD
CAD
CHF
EUR
NOK
PLN
USD
USD
USD
USD
USD
Consumer Confidence
Int'l Securities Transactions
Existing Home Sales (MoM)
SNB Sight Deposits
ECB's Draghi spks (Frankfurt)
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
10:45
12:40
N/A
N/A
03:00
05:00
23:50
N/A
N/A
12:00
12:30
AUD
AUD
CAD
EUR
EUR
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)
ECB's Praet spks (Frankfurt)
ECB's Nouy spks (Frankfurt)
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
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%
07:00
08:30
09:00
21:00
04:30
23:50
09:00
09:30
12:30
12:30
14:00
14:00
CHF
CHF
CHF
CLP
JPY
JPY
NOK
NOK
USD
USD
USD
USD
Trade Balance
SNB Rates Decision
SNB's Jordan spks (Zurich)
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
MS forecast
Feb
Feb
Jan F
Market
6.7%
-5k
14%
Mar P
14%
95.5
Previous
6.6%
35.4k
4%
15%
95.4
Feb
57.8
Jan
Feb
110.3
-13.5B
-3.1%
Feb
Feb
Mar
Feb
Feb
Mar
Jan
0.3%
79.5%
0.5%
8
0.3%
79.5%
57
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%
0.1%
0.1%
105.1
-1179.1B
0.1%
7.50%
1025k
7.5%
1045k
7.5%
1065k
Jan F
Feb
Feb
Wed
0.25%
0.25%
0.25%
Thu
3.43B
-0.75%
-0.75%
Jan
3%
0.2%
3%
0.75%
4Q
-101.5bn
Mar
Feb
0.1%
3%
-0.3%
1.25%
-102
305k
8
0.2%
-100.26
320k
5.2
0.2%
17
MORGAN STANLEY RESEARCH
March 12, 2015
FX Pulse
20-Mar
Fri
22-Mar
Sun
23-Mar
Mon
24-Mar
25-Mar
26-Mar
27-Mar
07-Apr
09-Apr
15-Apr
15-Apr
29-Apr
29-Apr
02:10
12:30
12:30
09:00
09:30
03:30
00:00
02:00
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)
19:00
EUR
First Round of French Departmental Elections
22:30
23:00
08:00
08:00
15:00
14:00
14:00
AUD
AUD
CHF
CHF
EUR
ILS
USD
Consumer Confidence
Conference Board Leading Index
M3 (YoY)
SNB Sight Deposits
Consumer Confidence
BoI's Rates Decision
Existing Home Sales
01:45
09:00
09:00
09:30
09:30
13:00
21:45
12:30
12:30
14:00
14:00
CNY
EUR
EUR
GBP
GBP
HUF
NZD
USD
USD
USD
USD
PMI Manufacturing
PMI Manufacturing
PMI Services
CPI (YoY)
ONS House Price (YoY)
NBH Rates Decision
Trade Balance
CPI (YoY)
CPI Ex Food and Energy (YoY)
New Home Sales
Richmond Fed Manufacturing Index
00:30
07:00
01:45
09:00
08:00
12:30
AUD
CHF
CNY
EUR
SEK
USD
RBA's Financial Stability Review
Consumption Indicator
Consumer Sentiment
IFO Expectations
Economic Tendency Survey
Durable Goods Orders
13:30
12:00
09:00
09:30
23:30
23:50
19:00
08:00
08:30
08:30
N/A
12:30
15:00
N/A
CAD
CZK
EUR
GBP
JPY
JPY
MXN
PHP
SEK
SEK
TWD
USD
USD
ZAR
BoC's Poloz spks (London)
CNB Rates Decision
M3 (YoY)
Retail Sales (MoM)
CPI (YoY)
Retail Trade (YoY)
Banxico Rates Decision
BSP Rates Decision
Trade Balance
PPI (YoY)
CBC Rates Decision
Initial Jobless Claims
Kansas City Fed Manufacturing Activity
SARB Rates Decision
NOK
NOK
NOK
SEK
USD
USD
Retail Sales (MoM)
Unemployment Rate
Norges Bank's Olsen spks
Retail Sales (MoM)
GDP (QoQ)
Univ. of Michigan Confidence
AUD
GBP
EUR
CAD
SEK
NZD
RBA Rates Decision
BoE Rates Decision
ECB Rates Decision
BoC Rates Decision
Riksbank Rates Decision
RBNZ Rates Decision
Feb
Jan
Jan
Feb
1%
-2%
17.796B
-8.75B
Mar
Feb
124
1.9%
Jan
Feb
110.3
0.4
3.16%
Mar A
0.1%
-6.7%
0.1%
4.82m
1.9%
Feb
Feb
Feb
Feb
Mar
50.7
51
53.7
0.3%
9.8%
2.1%
56m
-0.1%
1.6%
481k
0
Feb
Mar
Mar
Mar
Feb
1.24
112
102.5
104.8
2.8%
0.1%
Feb
Tue
Mar P
Mar P
Mar P
Feb
Jan
2%
Wed
Thu
0.05%
0.05%
Feb
Feb
Feb
Feb
3%
2.5%
Feb
Feb
1.875%
305k
Mar
5.75%
0.05%
4.1%
-0.7%
2.4%
-2%
3%
2.5%
3.5
0.18%
1.875%
320k
1
5.75%
Fri
09:00
09:00
N/A
08:30
12:30
14:00
Upcoming Risk Events
05:30
12:00
12:45
15:00
08:30
22:00
Feb
Mar
-0.7%
3%
Feb
4Q T
Mar F
1.16%
2.2%
95.4
Apr
Apr
Apr
Apr
Apr
Apr
95.5
2.25%
0.50%
0.05%
0.75%
2.25%
0.50%
0.05%
3.50%
3.50%
2.25%
0.50%
0.05%
0.75%
-0.10%
3.50%
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
18
MORGAN STANLEY RESEARCH
March 12, 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.
19
MORGAN STANLEY RESEARCH
March 12, 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)
6%
13.0
4%
12.0
2%
11.0
0%
10.0
-2%
-4%
9.0
-6%
8.0
-8%
DXY NZD AUD CAD SEK JPY GBP NOK EUR CHF
Monthly
7.0
6.0
Weekly
5.0
Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 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
-4
USD
JPY
CAD
NZD
AUD
Current
GBP
SEK
CHF
EUR
NOK
-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)
Nov-14
Jan-15
NZD
99
CHF
96
MXN
93
GBP
90
CAD
87
AUD
84
JPY
81
EUR
78
Jan-14
-26 -24 -22 -20 -18 -16 -14 -12 -10
Mar-14
May-14
Jul-14
Source: Bloomberg, Morgan Stanley Research
Sep-14
Nov-14
Jan-15
-8
-6
-4
-2
Mar-15
Note: Aggregate USD positioning in nominal terms, see appendix for details.
Source: Bloomberg, Morgan Stanley Research
20
MORGAN STANLEY RESEARCH
March 12, 2015
FX Pulse
Click here for a full positioning history
Morgan Stanley FX Positioning Tracker
Calvin Tse, Sheena Shah
Overall Score
Component Scores
This
Week
Last
Week


Short
Neutral
-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2
Long
3 4 5 6 7 8
9 10

USD
1
1
EUR
-3
-3
JPY
1
1
GBP
-4
-3
CHF
0
0
CAD
-4
-4
AUD
0
-1
NZD
-3
-3
NOK
1
-2

SEK
-1
-2
 


 


 


MS
Flow
IMM
Toshin
TFX
Beta
ETF
Since Monday, March 9, positioning in
currencies has shifted. The largest shorts
are in GBP and CAD. There are no
significant longs in the G10.

GBP short positioning increased intraweek. This was driven by large selling
from global macro hedge funds.

AUD shorts were reduced and positioning
is now neutral. Over the last week
Japanese retail were the main buyers.

We will provide a full updated report and
refresh positioning scores for all of our
underlying sub-indicators on Monday.
Sentiment
-8
6
-10
6
2
10
USD
-2
-9
6
-6
4
-10
EUR
9
10
10
-8
-2
-8
JPY
-10
-3
-3
1
1
-8
GBP
9
-2
3
-10
CHF
-3
-5
-1
-7
CAD
10
-7
2
1
-7
AUD
-5
-6
7
-2
-7
-1

NZD
1
0
NOK
-4
2
SEK
For methodology, see Appendix.
Tactical Rich and Cheap Fair Value Model
AUD
CAD
CHF
EUR
GBP
JPY
NOK
NZD
SEK
Average
Spot Fair Value Z-Score
0.77
0.77
0.27
1.26
1.27
1.75
0.99
0.97
-1.37
1.08
1.25
-3.45
1.50
1.52
-3.66
120.83
119.79
-0.32
7.91
6.79
-6.36
0.74
0.71
1.30
8.46
7.59
-7.73
TRAC Trade Exp. App.
Neutral
-0.05%
Short
-0.97%
Long
1.38%
Long
15.25%
Long
0.82%
Neutral
0.87%
Long
16.48%
Short
-3.94%
Long
11.51%
4.59%
BRL
CLP
COP
HUF
ILS
IDR
INR
KRW
MYR
MXN
PHP
PLN
RUB
SGD
THB
TRY
ZAR
Average
Spot Fair Value
3.06
3.19
628
650
2,585
2,514
306
310
4.02
3.69
12,976
13,283
62.17
62.26
1,099
1,072
3.65
3.34
15.50
15.55
44.09
44.08
4.13
4.17
60.22
79.54
1.38
1.36
32.58
32.62
2.62
2.57
12.04
11.40
Z-Score
1.20
1.81
-0.86
0.89
-4.38
1.55
1.00
-0.60
-2.91
1.96
-0.01
0.68
1.06
-1.40
0.66
-2.29
-2.43
TRAC Trade Exp App
Short
-4.06%
Short
-3.45%
Neutral
2.83%
Short
-1.37%
Long
8.87%
Short
-2.31%
Short
-0.14%
Neutral
2.52%
Long
9.17%
Short
-0.34%
Long
0.01%
Neutral
-0.88%
Short -24.29%
Long
1.08%
Short
-0.14%
Long
2.03%
Long
5.63%
-0.28%
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 March 9, 2015.
21
MORGAN STANLEY RESEARCH
March 12, 2015
FX Pulse
Central Bank Watch
Next rate
Market
MS
decision
expects (bp)
expects (bp)
US
18 Mar
1
0
Euro Area
15 Apr
-2
Japan
17 Mar
0
UK
09 Apr
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
Canada
15 Apr
-6
0
0.75
0.75
Switzerland
19 Mar
-6
0
-0.75
-0.75
-0.75
-0.75
-0.75
Sweden
29 Apr
-3
0
-0.10
-0.10
-0.10
-0.10
-0.10
Norway
19 Mar
-15
-50
1.25
0.75
0.75
0.75
0.75
Australia
07 Apr
-11
0
2.25
2.25
2.00
1.75
1.75
New Zealand
29 Apr
-
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
-12
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
-5
-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
-
0
7.50
7.5
7.25
7.25
7.25
Israel
23 Mar
0
0
0.10
0.10
0.10
0.10
0.10
South Africa
26 Mar
13
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
-
-25
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
09 Apr
3
0
1.75
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
3.25
3
2.75
2.75
Thailand
11 Mar
-10
-25
2
1.75
1.50
1.50
1.50
Brazil
29 Apr
65
-
12.75
-
-
-
-
Mexico
26 Mar
4
0
3
3.00
3.00
3.00
3.50
Chile
19 Mar
-4
0
3
3
2.75
2.75
2.75
Peru
12 Mar
-
0
3.25
3.25
3.00
3.00
3.25
Colombia
20 Mar
0
0
4.5
4.50
4.50
4.50
4.50
Source: National Central Banks, Morgan Stanley Research forecasts as of March 12th; 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
China
30
Brazil
6
25
Russia
5
4
3
15
2
10
1
0
2002
India
20
5
2004
2006
2008
Source: Morgan Stanley Research, Haver Analytics
2010
2012
2014
0
2002
2004
2006
2008
2010
2012
2014
Source: Morgan Stanley Research, Haver Analytics
22
MORGAN STANLEY RESEARCH
March 12, 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
1.30
1.25
1.20
1.15
1.10
1.05
1.00
0.95
0.90
0.85
0.80
Jun-12
MS F orecast
Jun-13
Jun-14
Jun-14
Jun-15
MS F orecast
MS F orecast
Jun-13
Jun-14
Jun-15
MS F orecast
35
34
1.35
1100
33
1.30
1050
Jun-15
29
Jun-13
Jun-14
Jun-15
4.25
Jun-13
Jun-14
Jun-15
USDZAR
EUR/CZK
30
MS F orecast
USD/ZAR
14.5
29
13.5
12.5
28
4.15
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
USD/BRL
3.70
3.50
3.30
3.10
2.90
2.70
2.50
2.30
2.10
1.90
1.70
Jun-12
28
Jun-12
MS F orecast
4.35
3.75
Jun-12
Jun-15
MS F orecast
EURCZK
MS F orecast
Jun-14
30
EURPLN
EUR/PLN
4.45
Jun-13
31
950
Jun-14
MS F orecast
32
1000
900
Jun-12
Jun-15
USDTHB
USD/THB
36
1150
1.25
Jun-14
AUDUSD
AUD/USD
1.09
1.04
0.99
0.94
0.89
0.84
0.79
0.74
0.69
0.64
Jun-12
1200
Jun-13
Jun-13
USDKRW
USD/KRW
1250
1.40
1.20
Jun-12
MS F orecast
USDCAD
USDSGD
USD/SGD
1.45
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-14
Jun-15
7.5
Jun-12
Jun-13
USDMXN
MS F orecast
Jun-13
Jun-14
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.
23
MORGAN STANLEY RESEARCH
March 12, 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
1.06
121
1.49
1.00
8.60
8.08
1.27
0.77
0.74
129
0.71
1.06
9.14
8.59
6.26
7.77
13183
62.5
1126
3.69
44.2
1.38
31.6
32.8
3.1
15.36
8.8
6.3
631
2600
3.1
12.2
2.59
4.01
60.9
4.19
27.8
314
4.41
96.95
101.46
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
-2.8
1.6
-8.6
5.1
5.6
12.1
6.3
-6.8
-8.5
-0.5
5.7
0.0
3.3
9.4
-1.8
0.5
0.9
-0.8
8.4
4.9
3.5
1.4
1.6
2.4
-1.7
4.1
7.3
-60.0
4.6
4.5
0.0
2.5
-1.9
1.7
6.7
5.3
1.5
5.5
2.0
4.7
-1.9
-1.8
5.4
-7.5
3.2
5.8
9.2
6.2
-9.2
-10.0
3.5
6.2
1.4
3.9
7.3
-4.3
0.4
-6.4
-4.6
8.9
1.9
5.2
1.0
3.6
2.5
-14.4
-3.8
9.1
122.5
1.8
-2.7
-1.5
-4.2
-9.1
4.0
6.7
3.9
2.4
6.0
0.2
5.1
-0.2
Source: Morgan Stanley Research
24
MORGAN STANLEY RESEARCH
March 12, 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.
25
MORGAN STANLEY RESEARCH
March 12, 2015
FX Pulse
Global FX Strategy Team
Head of Global FX Strategy (London)
Hans Redeker, Managing Director
[email protected]
(44 20) 7425 2430
Co-Head of US FX Strategy (New York)
Co-Head of US FX Strategy (New York)
Currency Strategist (New York)
Currency Strategist (New York)
Evan Brown, CFA, Vice President
Calvin Tse, Vice President
Dara Blume, Associate
Charles Rubenfeld, Analyst
[email protected]
[email protected]
[email protected]
[email protected]
(212) 761 2786
(212) 296 5423
(212) 296 5786
(212) 296 5911
Head of European FX Strategy (London)
Currency Strategist (London)
Currency Strategist (London)
Ian Stannard, Executive Director
Sheena Shah, Analyst
Vandit D. Shah, Analyst
[email protected]
[email protected]
[email protected]
(44 20) 7677 2985
(44 20) 7677 6457
(44 20) 7425 3978
Head of Asia FX and Rates Strategy (Hong Kong)
AXJ FX Strategy (Hong Kong)
Rates/FX Strategist (Hong Kong)
AXJ Strategy (Hong Kong)
Geoffrey Kendrick, Executive Director
Jessica Liang, Vice President
Kewei Yang, Executive Director
Kritika Kashyap, Associate
[email protected]
[email protected]
[email protected]
[email protected]
(852) 2239 7399
(852) 3963 3021
(852) 3963 0562
(852) 2239 7179
LatAm Macro Strategy (New York)
LatAm Local Rates Strategy (New York)
Felipe Hernandez, Vice President
Robert Habib, Associate
[email protected]
[email protected]
(212) 296 4996
(212) 761 1875
Global EM Macro Strategy (London)
CEEMEA Macro Strategy (London)
James Lord, Executive Director
Meena Bassily, Associate
[email protected]
[email protected]
(44 20) 7677 3254
(44 20) 7677 0031
Morgan Stanley entities: London – Morgan Stanley & Co. International plc; New York – Morgan Stanley & Co. LLC; Hong Kong – Morgan Stanley Asia Limited.
26
MORGAN STANLEY RESEARCH
March 12, 2015
FX Pulse
This material includes trade flow data that have been compiled by the Morgan Stanley Foreign Exchange trading desks from transactions executed
by Morgan Stanley in the over-the-counter foreign exchange markets with its global institutional and high net worth individual customer base. The
data have been aggregated and anonymized in a manner that does not identify the underlying transactions of any particular customer. In compiling,
interpreting, and analyzing the data, Morgan Stanley makes certain assumptions, which may vary over time, relating to the classification of an
account as a client. No representation is made that the aggregated data are reflective of trading patterns or trends in the markets included in this
material for any particular type of customer.
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27
MORGAN STANLEY RESEARCH
March 12, 2015
FX Pulse
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