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MORGAN STANLEY RESEARCH
Global Currency Research Team
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March 26, 2015
Currencies
Global
FX Pulse
Buying Dollar Dips
USD Correction Complete? US data continue to
confound, with labour markets performing well even as our
1Q GDP tracker declined from 3% to 0.9%. Rate
expectations have eased, supporting our US economists’
view that the Fed will hike rates late. However, rate
expectations have fallen even below our own dovish
projections. Hence, we believe it will not take a lot to make
rates bounce back, terminating the USD-bearish corrective
pattern.
Stay Clear of Geopolitics. Geopolitics have complicated
issues and, should tensions in the Middle East escalate, a
further easing of cross-border capital flows would not bode
well for double-deficit currencies such as ZAR, TRY, BRL,
or even AUD and NZD, which look vulnerable owing to
externally funded liability positions. Nonetheless, trading
on geopolitics does not offer favorable enough risk/reward,
in our view, as politically-motivated market moves tend to
be short-lived.
Buying USD into Weakness. Instead, we use dips
caused by the strong countertrend oil rally to establish
USD/NOK long positions. High oil production and
inventory growth suggest oil prices could stay low,
highlighting Norway’s need to restructure its non-energy
sector, which would require NOK to stay soft. USD should
return to strength once US data recover from current
weakness. A strong US March labor market report would
return us to more aggressive USD buyers.
Closed Trades
Entry
Stop
Target
Stopped at 3.0690 on 24-Mar-15
Long USD/PEN
Took profit at 2.5550 on 23-Mar-15
Long USD/TRY
Took profit at 68.00 on 23-Mar-15
Short EUR/INR
Close at NY Close on 26-Mar-15
Long EUR/NOK
Active Orders
Entry
Stop
Target
Long USD/THB
32.78
32.00
35.00
Long USD/ILS
3.9940
3.9000
4.2500
Long CLP/COP
4.10
4.08
4.28
Long JPY/KRW
9.28
9.00
9.80
Limit Orders
Entry
Stop
Target
Buy USD/NOK
7.48
7.32
8.30
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
Deflation & Depreciation: It’s Complicated
P6
Technical Chart of the Week – JPY/KRW
P10
Strategic FX Portfolio Trade Recommendations
P11
G10 & EM Currency Summary
P14
Global Event Risk Calendar
P16
Tactical Indicators
P18
This Week’s Edition
MS FX Positioning Tracker
P19
We explore lowflation and its impact on FX moves.
Lowflation has played out as a theme, but the largest
depreciation has not been in lowflationary currencies.
With volatility likely to remain high, externally vulnerable
high-carry currencies could continue to be the
underperformers, without a catalyst for lowflationary
central banks to become more aggressive. That said, we
do expect lowflation to be a theme that lasts beyond the
first Fed hike, and hold our lowflationary trades.
Macro Forecasts
P20
FX Forecasts
P22
For important disclosures, refer to the
Disclosures Section, located at the end of
this report.
MORGAN STANLEY RESEARCH
March 26, 2015
FX Pulse
FX Overview
 We believe that the USD correction is running out of steam,
although increased geopolitical events in the Middle East
could add to volatility.
 The correction in FX markets continues to be driven by USD,
but Fed members have increasingly noted the transitory
nature of the data soft patch.
 Hence, we view the current USD setback as providing a
buying opportunity, but await the March payroll report.
 Structural EUR flows remain bearish – EUR is being used for
funding – while investment inflows remain hedged.
 FDI flows are having an increasing currency impact, with
USD to benefit, while GBP losses support.
Data-Driven USD
“How long will the USD correction last?” is a question we are
now frequently asked, as the debate regarding the USD trend
gains momentum. We believe that the bullish multi-year trend
will persist, with potential for further significant gains over the
next couple of years. However, the data-dependency of Fed
policy, not just lift-off, but the subsequent path, suggests that
there will be periods when a more tactical approach will be
required, as is currently the case. The potential for an escalation
of geopolitical risks in the Middle East will also add to volatility.
Indeed, there is strong evidence that the broad correction
currently developing in currency markets is being driven by
the USD side of the equation, with local/regional news and
data only generating differentiation on the crosses. We have
adopted a more tactical approach to our trading
recommendations in the current environment. Last week, we
reduced some our long USD positions and tightened stops on
the remaining positions. We continue to focus on relative
value cross trades in the current environment, such as our
long JPY/KRW strategy, and await the US labor market data
before we consider re-entering bullish USD strategies.
The focus remains on the US data and, more importantly, the
Fed’s interpretation of the data. The current soft data patch
(weather and port disruption) is consistent with the current USD
setback, but has increased the focus on the upcoming April 3
non-farm payroll release. The US labor market has remained
relatively robust despite softness seen in other indicators; hence,
a disappointment here could prolong the current USD setback.
Indeed, our US economists have a below-consensus forecast of
195k for the March non-farm payrolls report (see U.S.
.
Economics: Key Data Watch Calendar (20 Mar 2015)). In this
scenario, we would then expect the market to require a stronger
signal, either from the data and/or the Fed regarding policy, to
resume the USD bullish trend. However, continued
improvement in the labor market data could see USD returning
to its bullish multi-year trend much earlier. Indeed, we see the
US labor market currently acting more as a leading indicator,
rather than a lagging economic activity as is traditional.
In this regard, we found the comments over the past week by
the Fed’s Williams interesting, insofar as the current data
softness is described as transitory, suggesting that the Fed is
willing to look through the slowdown and act according to the
longer-term outlook. Indeed, Williams suggests that once the
short-term data volatility is stripped out, he sees an economy
with a “good head of steam”, which is getting close to full
employment. Williams sees the strengthening domestic
economy overwhelming the energy and currency impacts. The
Fed’s Bullard has also played down the impact of the
strengthening USD. The market has yet to react to this signal,
but if the Fed strengthens the message that the current soft
data patch is not likely to blow policy off course, USD could
quickly regain its footing.
Exhibit 1
US Rate Expectations
Fed Funds Rate (%)
Ian Stannard, James Lord
1.66
1.46
1.26
1.06
0.86
0.66
0.46
0.26
0.06
0
1
2
3
4
5
6
7
Tenor (m)
Today
8
9
10
11
12
10 days ago
Source: Bloomberg, Morgan Stanley Research
The current EUR/USD rebound, slightly breaching the 1.10
level over the past week, is consistent with the rebound seen
in the EU-US yield differential. However, closer examination
points once again to the US side of the equation being the
driving force. Indeed, eurozone core yields have continued to
push lower as a result of the ECB’s QE program. This has led
to the most significant divergence between EUR and
European yields since the EUR decline started six months
ago. It is the decline in US yields which has been driving the
2
MORGAN STANLEY RESEARCH
March 26, 2015
FX Pulse
EUR/USD rebound. Interestingly, EUR has been gaining
bullish momentum on many of the crosses as well.
Structurally Bearish EUR
We have been highlighting the use of EUR for funding
purposes (see FX Pulse: EUR – A Funding Currency (13 Nov
2014)), not just for portfolio but also for longer-term business
investment. The rise of European bank lending to overseas
entities and the sharp increase in foreign corporates issuing in
EUR are evidence of this, in our view. The ECB’s Draghi has
also noted that QE has been working by bringing corporate
borrowing costs down. We would agree, but would also add
that given the lack of demand for borrowing by eurozone
corporates, it is foreign companies which have been able to
take advantage of lower borrowing costs in the eurozone. This
would suggest that EUR remains a major transmission
mechanism for ECB policy.
Exhibit 2
US Investor Flows to EMU and EUR/USD
border purchases that are important when it comes to
assessing the currency impact. Given the low level of rates in
Europe, it is logical for foreign companies to raise the funds in
EUR to purchase European companies. Again, the use of EUR
as a funding currency suggests that it will not benefit from any
increase in cross-border investment flows. This suggests that
there is unlikely to be much of a positive impact on EUR from
increased M&A or FDI inflows to the eurozone.
FDI Gaining Importance
Overall, we expect FDI flows to become an increasingly
important factor for currency markets. Indeed, FDI, as a
percentage of overall inflows, have been increasing, a trend
we would expect to continue, not just for the eurozone, but
also among the major currency blocs. While overall FDI flows
are not as large as overall portfolio flows, their increasing
influence suggests that FDI (including cross-border M&A)
flows will be important for currency markets. In many DM
markets, FDI flows are comparable to equity markets in terms
of magnitude, although generally speaking not as large as
bond market flows. This is certainly the case with regard to
the eurozone, where FDI flows regularly exceed equity market
flows, suggesting that these would normally be an important
factor for EUR, but while EUR is being used for funding, this is
unlikely to deliver the traditional support.
Exhibit 3
US Portfolio and Equity Market Inflows
2.0%
1.5%
1.0%
FDI Inflows
Equity Inflows
Bond Inflows
(RHS)
8%
7%
6%
Source: Macrobond, Morgan Stanley Research, 12m rolling sums
0.5%
The decline of EUR has been attracting inflows into eurozone
asset markets, as evidenced by the outperformance of the
Eurostoxx since the beginning of the year. We have argued
that these inflows have been currency-hedged, so have not
provided EUR support, leading to a breakdown of the
correlation between EUR and the Eurostoxx year to date.
However, the media has been highlighting another potential
investment inflow to the eurozone – foreign direct investment
flows with the purchases of eurozone assets and companies
by foreign investors.
0.0%
4%
-0.5%
3%
-1.0%
2%
-1.5%
1%
Although the M&A inflow data to the eurozone have been more
mixed recently, recent media reports of various deals suggest
that these are showing signs of gaining some positive
momentum. Usually, this would be seen as a positive for a
currency. However, it is the funding details of these cross-
-2.0%
5%
0%
91 93 95 97 99 01 03 05 07 09 11 13
Source: Haver Analytics, Morgan Stanley Research. Measured as % of GDP, 12m rolling
sums.
Even in the US, FDI flows tend to match the size of equity
flows. During the last USD-bullish super cycle in the late
1990s to early 2000, which was driven by investment inflows,
both equity and FDI inflows to the US reached the equivalent
of 7% of GDP. As at the end of last year, these flows were
running around 1% of GDP, at historical lows. However, we
would now expect the FDI inflows to the US to show a pick-
3
MORGAN STANLEY RESEARCH
March 26, 2015
FX Pulse
up, in line with the increase in cross-border M&A inflows to
the US, which have now turned positive after an extended
period of being negative. We would see this as a further
source of USD support, especially if funding for such
investment is being carried out in EUR. US corporates have
been responsible for a significant proportion of the foreign
entities issuing in EUR in recent months (around 35%), with
the rate running at levels last seen in 2007.
Slowing FDI Leaves GBP Vulnerable
One place where we believe that FDI flows, or lack of flows,
will play an important role in the coming months is the UK.
GBP has been a major beneficiary of FDI inflows over the
past couple of years, with business investment in the UK
outstripping the pace seen in much of the rest of the G10.
These flows have been a significant contributor to the funding
of the UK’s record current account deficit. However, business
investment in the UK is now slowing and our analysis of M&A
inflows suggests that the longer-term FDI inflows to the UK
are starting to slow and have even turned negative in recent
months. This contrasts with the positive FDI dynamics seen
for the US and Europe.
the outcome of the election but also what we believe to be a
more challenging policy environment for GBP after the
election (see UK Economics | Election Monitor: Poll
Perspective #4: Will the Budget Be Decisive? (13 Mar 2015)).
Increased fiscal austerity, an EU in/out referendum
(Conservatives) and progressive tax measures (Labour) are
the potential policy outcomes under our base case scenarios
of the new government being led by one of the traditional
parties. Hence, it may be some time before GBP is able to
more fully benefit from FDI flows, likely exposing GBP more
fully to volatile portfolio flows. Here the UK rate debate will
also become more important.
Exhibit 5
UK CPI and GBP/USD
Exhibit 4
FDI Inflows to UK and GBP TWI
Source: Macrobond, Morgan Stanley Research
The 0% Club
Source: Macrobond, Morgan Stanley Research, 12m rolling sums, ₤ Bn
Political uncertainty ahead of the UK election has been cited
in business surveys as the reason for the slowing of business
investment. With the opinion polls for the election remaining
neck-and-neck between the Conservatives and Labour, this
uncertainty is likely to persist, and could even intensify over
the coming weeks. The UK parliament will be dissolved on
March 30, by which time the individual political parties need to
have published their election manifestos (there is an incentive
to leave this right to the last minute so as not to reveal policies
to rivals). As a result, the election campaign will step up a
gear next week, highlighting not only the uncertainty regarding
The UK has joined the 0% inflation club with February CPI
printing at record-low levels of 0.0%Y, increasing the risk of
the UK slipping into deflation over the coming months, as BoE
Governor Carney has warned. Indeed, our UK economists
have taken their inflation forecasts lower and project negative
CPI prints in March and April (see UK Economics: Inflation:
Sticky services inflation suggests lowflation driven by external
factors (24 Mar 2015)). The UK has now joined the US with
CPI at 0%Y, with the eurozone and Switzerland still in
negative territory at -0.3%Y and -0.8%Y, respectively.
Sweden is also only just above zero, at 0.07%Y. Moreover,
there are other signs that UK economic growth is moderating,
with the ONS housing market data showing prices falling for
the first time in 10 months in January, although retail sales
surprised positively in February.
GBP has been the weakest of the G10 currencies over the past
week, with the GBP/USD rebound remaining muted despite the
broader USD correction, allowing EUR/GBP to extend a more
4
MORGAN STANLEY RESEARCH
March 26, 2015
FX Pulse
significant recovery, which we believe can target the 0.75 area,
a 50% retracement of the decline seen since the beginning of
the year. Meanwhile, we believe that the GBP/USD rebound
has provided a renewed selling opportunity.
Weaker US Data, Weaker EM Data
EM currencies have recovered over the past two weeks on
the back of the more dovish-than-expected FOMC meeting,
combined with further soft data on the US economy. However,
we are unwilling to enter into any bullish high-beta EM trades
versus USD, for a number of reasons.
The outlook for USD remains highly uncertain. We are very
much dependent on how the trajectory of US macroeconomic
data evolves. Although the balance of data in the last few
weeks has been on the softer side, we clearly saw how USD
regained its footing in response to the firmer-than-expected
CPI data coming from the US. The reality is that, in all
probability, rate hikes from the FOMC will be on the table from
June onwards, and market volatility is likely to be high as we
swing from data surprise to data surprise. This uncertainty
and volatile market environment does not fill us with
confidence that capital flows will be rushing back into EM.
Exhibit 6
Weaker Korea Macro Should Pressure KRW
120
8
115
6
110
4
105
100
2
95
0
90
-2
85
80
Sep 08
-4
Sep 09
Sep 10
Sep 11
South Korea Consumer Sentiment
Sep 12
Sep 13
Sep 14
South Korea GDP Growth % y/y
Source: Macrobond, Morgan Stanley Research
This is particularly the case given the ongoing evidence that
EM economies remain far from recovery. The majority of
macroeconomic data continues to come in on the weak side,
with a few exceptions such as in the Central and Eastern
European region, which is benefitting from the weak EUR.
China data remain weak, while South Korea consumer
confidence continues to head lower and is threatening to
break multi-year lows. Thailand exports are falling at a fast
pace, and Singapore’s industrial production data for February
came in below expectations. The Central Bank of Turkey has
signalled growth concerns for 1Q. EM currencies can only
really hope to rally versus USD because of a weak rather than
strong EM per se. This view has been corroborated by the
price action as well, in our view, with EM currencies
underperforming the rebound in EUR.
Finally, the risk backdrop is far from stable. The escalation of
the conflict in Yemen, bringing Saudi Arabia and other Arab
states into more direction confrontation, is prompting a greater
risk premium to be priced into oil prices. The fear is that the
conflict will continue to escalate beyond what has been
considered so far to be a proxy conflict between Iran and
Saudi Arabia into a more direct confrontation.
With the medium-term outlook of a strengthening US
economy and likely rate hikes from the FOMC, we remain
confident about the strength of USD.
EM fund flows continue to show outflows from the asset class,
with EM-dedicated equity funds showing outflows of US$2.68
billion in the week ending March 20, following a US$3.5 billion
outflow in the prior week.
All this said, clearly a downside surprise in the upcoming US
labor market report would result in further downward pressure
on USD and prompt some recovery in EM versus USD.
Nevertheless, for the above reasons we are unwilling to
position in high-beta EM. For now, we stick to positions that
are less dependent on the FOMC and the path of US data.
For example, long USD/ILS and long USD/THB are both lowbeta crosses that should work in the near term. The Bank of
Israel in particular has shown its hand by pushing back
against recent ILS strength. We expect this to continue, and
stick with our long USD/ILS view.
Long JPY/KRW
We also like to buy JPY/KRW. We think that this is a positive
long-term trend that should to some extent be relatively
insulated against the broader USD trend. Should the current
risk correction continue, JPY/KRW would be a natural
beneficiary, in our view. We also see growing confidence in
the outlook for the Japanese economy. Our economics team
is highlighting that continued gains are expected in wage
growth, with a positive impact on domestic demand. The
economic upswing is expected to be gradual but durable into
2017. This would suggest that more JPY weakness is not
necessarily needed in order to support the economic outlook,
leading to a more stable JPY outlook.
5
MORGAN STANLEY RESEARCH
March 26, 2015
FX Pulse
Deflation & Depreciation: It’s Complicated
Dara Blume
Exhibit 1
 The juxtaposition of ECB QE with the approach of the first
Fed hike has led to large currency moves, with high carry
currencies vulnerable to external funding conditions leading
the sell-off.
 This is likely to continue in the run-up to the first Fed hike,
with currencies trying to maintain competitiveness levels
regionally.
 This implies European G10 and EM currencies should trade
in line with EUR, while AxJ aims to weaken against JPY or
CNY.
 Post Fed, however, there is scope for deflation to remain on
the radar.
Deviation from Inflation Target
The Deflation Theme Persists
 Deflation has worsened, but lowflationary currencies have
not been the underperformers.
4
Inflation falling
but above target
IDR
3
2
BRL Inflation rising
and above target
TRY
PEN
1
0
INR ZAR
CLP
COP
MXN
AUD
NOK
NZD
CAD
USD
CNY
GBP
TWD
-2
JPY RON CZK SEK
PHP
EUR
KRW
-3 THB ILS
CHF
PLN
SGD
-4
-3
-2
-1
0
1
Inflation falling and
1Y
Change
in
Inflation
below target
-1
2
3
Inflation rising
but below target
Source: Haver Analytics, Morgan Stanley Research, Bloomberg. RUB removed from chart
because it is an outlier.
Exhibit 2
 We like holding low-cost lowflation trades which we believe
could pay off over a longer time horizon. We remain long
JPY/KRW, USD/THB, and USD/ILS.
Core Inflation Has Fallen Too
3.0
2.0
Though the deflation theme has played out, the currencies
that have underperformed since then have not been the
lowflation currencies, but rather, high-carry currencies with
external vulnerabilities. As we approach the first rate hike, we
expect this environment to continue, and expect lowflation to
be a regional story, with European currencies trying to keep
pace with EUR as AxJ currencies aim to improve
competiveness versus JPY and CNY. We await a catalyst for
these lowflationary currencies to catch up. Without such a
catalyst, markets are likely to focus on the first Fed hike,
boosting volatility and weakening high-carry currencies with
external vulnerabilities. However, the lowflation theme could
persist beyond the first hike. Low-cost trades associated with
the lowflation theme could outperform over a longer time
horizon. For this reason, we stick to our long USD/ILS,
USD/THB, and JPY/KRW positions.
1.0
0.0
-1.0
-2.0
Change in Inflation
Change in Core Inflation
-3.0
-4.0
MYR
INR
THB
PLN
ILS
ZAR
GBP
PHP
IDR
MXN
HUF
SGD
PEN
USD
EUR
AUD
NZD
CHF
CNY
KRW
TRY
CZK
CAD
NOK
SEK
JPY
CLP
BRL
COP
In November, we presented a framework to help investors
consider which currencies could become vulnerable should
global disinflationary forces intensify (see FX Pulse: Deflation
Risks & Currency Conflict (20 Nov 2014)). Since then,
inflation has continued to fall across the board. In November,
there were 16 countries where the inflation rate was higher
than it had been a year ago; today, there are five (RUB, BRL,
CLP, COP, and SEK – see Exhibit 1).
Source: Haver Analytics, Morgan Stanley Research. We use headline core inflation or
inflation excluding energy and food if possible.
Deflation Yes, but Depreciation?
Clearly, the theme has played out and deflation has worsened
over recent months, even if we are now starting to see the
light at the end of the tunnel in some regions – Europe in
particular has shown glimmers of reflation. Falling commodity
prices have exacerbated lowflation, but core inflation in many
countries has fallen as well (see Exhibit 2). When we
highlighted this theme in November, we argued it would drive
currency depreciation in many countries that are vulnerable to
falling prices.
Looking at Exhibit 3, lowflation currencies have weakened, as
we expected. However, for the most part, these have not
been the biggest losers. Instead, looking at Exhibit 3, the
largest declines were seen in high-carry, externally-vulnerable
6
MORGAN STANLEY RESEARCH
March 26, 2015
FX Pulse
currencies (BRL, RUB, TRY) and commodity exporters (COP,
RUB, CAD, MXN, MYR). Many of these countries actually
happen to be in the small camp of highflation currencies.
Currencies which also trade more naturally on EUR crosses
also depreciated significantly, in line with the EUR weakness.
environment to shift, with volatility higher and investors less
willing to take on carry trades. This could lead to a drying up
of capital flow into these currencies, likely to be exacerbated
in regions reliant upon external funding.
Exhibit 4
High-Beta Currencies Have Been the Weakest
Exhibit 3
TWI and REER Performance Since December
10%
0.4
3m Beta to S&P
Jun13-Jun14 Average Beta
0.2
0.0
5%
-0.2
-0.4
0%
-0.6
-5%
-10%
-0.8
REER
TWI
-1.0
MXN
ZAR
BRL
INR
HUF
TRY
CLP
RUB
AUD
NZD
NOK
PLN
MYR
SEK
IDR
CAD
COP
KRW
EUR
CZK
RON
PEN
THB
PHP
GBP
TWD
CHF
ILS
JPY
-1.2
BRL
COP
RUB
TRY
CAD
MXN
MYR
EUR
NOK
CZK
AUD
IDR
PLN
SEK
SGD
ZAR
HUF
PEN
JPY
TWD
CLP
NZD
GBP
KRW
CNY
INR
THB
ILS
CHF
USD
-15%
Source: Morgan Stanley Research, Bloomberg. Average of Rolling 12 m beta over the time
period.
Source: BIS, Haver Analytics, Morgan Stanley Research, Bloomberg
Exhibit 5
st
Finally, as we approach the first rate hike, the divergence
between tightening in the US and easing almost everywhere
else drove large currency moves that in turn amplified FX
volatility (see Exhibit 5). This has challenged currencies with
external vulnerabilities, which tend to be the highflationary,
high-carry currencies. These currencies have done well in an
environment of ample liquidity from the commodity supercycle
and QE. As the Fed begins to tighten policy, we expect the
19
17
M1KE
5
FXVIX (RHS, Inverted)
6
7
15
8
13
Mar-15
Jan-15
Feb-15
Dec-14
Nov-14
Oct-14
12
Sep-14
5
Aug-14
11
Jul-14
7
Jun-14
10
May-14
9
Apr-14
9
Mar-14
11
Jan-14
The natural question is: why haven’t deflationary currencies
been the biggest underperformers? The answer to this has
several elements. The first is that the deflation theme did
actually play out, most notably with the introduction of ECB
QE. This drove a decline in EUR against USD that dragged
most lowflation European currencies with it (see The Global
Macro Analyst: The Dollar Tantrum (25 Mar 2015)). The USD
rally that this prompted in turn drove an underperformance of
high-beta currencies, which, by definition, tend to have the
largest moves in times of large directional shifts. These
currencies also tend to be high risk, and high carry. The
second reason is simply that commodities have continued to
sell off, exacerbating vulnerabilities in many already high-beta
currencies such as RUB, and raising the sensitivity of some
traditionally low-beta currencies such as COP (see Exhibit 4.)
FX Volatility Has Risen as Months to 1 Hike Fall
Feb-14
Evaluating the Deflation Framework
Source: Morgan Stanley Research, Bloomberg
Will Lowflationary Currencies Catch Up?
The truth is, as we approach the first Fed hike, the focus is
likely to remain on currencies perceived as vulnerable to
external funding squeezes. Data weakness and a dovish Fed
have driven markets to push back the timing of the first hike
somewhat, offering relief to these currencies amidst a USD
pause (see FX Pulse: Fed Flexibility = USD Volatility (19 Mar
2015)) but a combination of expected improvement in US data
as we move out of winter and the simple passage of time
towards the first hike should drive further USD strength.
What’s more, the Fed’s data dependent approach is likely to
7
MORGAN STANLEY RESEARCH
March 26, 2015
FX Pulse
raise volatility even further. In this environment, it is actually
the high-beta, highflation, high-carry currencies which could
be the biggest underperformers against USD as we have
already seen – ZAR, TRY, RUB, and BRL in particular come
to mind – for the reasons mentioned above.
Play Deflation via Regional Crosses
Without a catalyst for strong central bank reaction in the
lowflation currencies, higher-beta, externally-vulnerable
currencies are likely to underperform so long as volatility rises
in the run up to the first rate hike. During this time period, we
think the deflation theme may be best played as a regional
relative value trade. CEEMEA and AxJ have been most
susceptible to the deflation theme, partially because they
have imported deflation from their major trading partners, as
we argued in November. AxJ (and some CEEMEA) have
very high trade exposure as a share of GDP, while in
CEEMEA and some G10 European countries (CHF, SEK)
trade is particularly focused on the Euro Area, rather than a
diverse set of countries. This renders FX depreciation one of
the most effective ways to combat deflation (see CEE
Economics: Deflation Is Here – What Can Policy Do? (27 Jan
2015)). This is particularly true in places where scope for
traditional easing via policy rates is limited and debt levels are
high, as we discussed in November (see Economics &
Strategy Insights: Korea: Household Debt Concerns Could
Mean More FX Policy (09 Feb 2015)).. However, given the
particular regional focus for these currencies, they may focus
on EUR or JPY crosses, rather than a TWI subsection.
Exhibit 6
Trade with Certain Regions (% of GDP)
120
100
Japan
China
Euro Area
80
60
40
20
EUR
ARS
CNY
USD
INR
BRL
CAD
COP
JPY
MXN
VEF
IDR
PEN
ILS
NZD
AUD
PHP
TRY
ZAR
RUB
GBP
NOK
CLP
KRW
SEK
THB
RON
CHF
MYR
PLN
SGD
HUF
CZK
0
Source: Haver Analytics, Morgan Stanley Research,
Reflation Not a Cure All for Europe
Currencies with a focus on EUR, such as HUF, PLN, CHF,
and SEK are likely to see their currencies trade within a band
against EUR. As EUR depreciates against USD, particularly in
the second half of the year as the time to the first rate hike
declines, this implies depreciation in the currencies above
against USD, but this is unlikely to greatly differ from
EURUSD performance. This is in line with what we’ve seen
thus far. For these currencies to be the underperformers
against USD, EUR must become the worst performer against
the greenback.
This is true even in countries where we see signs of reflation.
Sweden is the most notable example of this, though we also
expect inflation to pick up in much of CEE (see CEEMEA
Compass (Respite, Reflation, Restructuring) (20 Mar 2015)).
However, reflation is only likely to take hold if meaningful
currency appreciation against major trading partners is
avoided. It is for this reason that the Riksbank surprised
markets by easing, despite hitting a bottom in inflation – the
central bank explicitly cited foreign exchange risks (Sweden
Economics: Riksbank: Cutting Further, Buying More (18 Mar
2015)). While not our base case, currency appreciation could
prompt this kind of reaction in other areas should appreciation
become a risk to inflation.
USD/AxJ: Slow Burn Higher
In AxJ, we think central banks may eventually play catch up to
combat rising deflation (see Asia Pacific Economics: Are
Asian Central Banks Embracing Deflation Risks? (24 Feb
2015)). The question is what will drive this catch up. Central
banks in the region thus far have been reluctant to cut. Core
inflation in the region has come down on the whole, but as
seen in Exhibit 2, there are many individual AxJ countries that
have not seen core prices fall yet. As a result, central banks
may be hoping that lowflation passes. In addition, high
household debt in many Asian countries raises the stakes on
rate cuts as it risks fuelling asset bubbles. However, as
export growth weakens, central banks may be tempted to cut
rates in order to target both growth and inflation (see
Asia/Pacific Economics: Why Asian Exports Are Stagnating
(10 Mar 2015)). In this light, weak growth could be the
catalyst for AxJ to play catch up. At the very least, central
banks could lean against the wind on their FX as a means of
combatting deflationary pressures. This is a particularly
useful tool in countries where household debt is high.
Without a deterioration in growth, deflation may not be
enough to make it outperform moves in USD/EM, at least for
now. We see three reasons for this. First, USD/AxJ is
typically lower beta, and therefore, could underperform in the
run-up to the first rate hike. Second, AxJ still runs a current
account surplus, and these inflows provide a natural boost to
8
MORGAN STANLEY RESEARCH
March 26, 2015
FX Pulse
the currency if not offset by capital outflows. Finally, the main
trading partners and competitors for most Asian currencies
are JPY and CNY. We expect both of these currencies to be
relatively stable over the next few months. In Japan, reflation
and rising wages are likely to keep the BoJ on hold and JPY
relatively stable. In China, there is some scope for near-term
depreciation, but a full-scale devaluation is unlikely (see
Strategy and Economics: Global Insight: Will the PBOC
Devalue the CNY? (05 Mar 2015)). As a result, policymakers
in AxJ may aim for devaluation against JPY or CNY. We hold
our long USD/THB and long JPY/KRW positions against this
backdrop.
Lowflationary Low-Beta Currencies Pay Off Later
However, we think the deflation theme is one that can persist
beyond the first Fed hike. While high-beta currencies could
see weakness front loaded as we approach the first hike, we
believe the deflation theme could persist even after the Fed
moves rates. Our work has found that USD tends to
appreciate most before the first hike (see FX Pulse: Fed
Tightening Cycles and USD (12 Mar 2015)). What’s more,
central banks may be holding out hope that the Fed hike will
do their work for them, via the USD appreciation. Should they
be disappointed after the first Fed hike, they may be forced to
take matters into their own hands and ease policy in order to
add to currency depreciation.
9
MORGAN STANLEY RESEARCH
March 26, 2015
FX Pulse
Technical Chart of the Week – JPY/KRW
Sheena Shah
Long-term JPY/KRW Chart
3 5
16.50
15.50
14.50
13.50
12.50
11.50
10.50
9.50
8.50
7.50
6.50
16.3430
15.7578 c
e= B
2
a
1
d
4
4
b
A
3
1
9.0613
5
=C
2
05RSI
06
07
08
09
10
11
05
06
07
08
09
10
11
12
13
14
15
JPY/KRW has completed a Cwave move down, which we
believe is about to turn around
and so we recommend bullish
positions. A full 5-wave
structure formed from a low of
7.4453 in 2007 and its
retracement is more than
complete, going beyond the
76.4% retracement level
around 9.56. There is bullish
divergence being shown in the
RSI, supporting a turnaround.
10
12
13
14
15
2-year JPY/KRW Chart
12.50
4
12.00
(2)
11.50
2
11.00
a
(1)
1
10.50
4
c
3
10.00
5= (3)
e=(4)
10.0886
b
9.50
d
9.00
RSI
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
(5)= 5 = C
Dec-14
Mar-15
5
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
The sub-structure presented
in the 2-year JPY/KRW chart
is open to interpretation, but
we believe that the low of
9.1553 is a bottoming out of
the structure, indicating
upside from here.
The risk to the view is a move
below this low; therefore, we
put a stop just below it at 9.00.
A move below 9.1553
suggests that the 5-wave
structures are not complete
yet.
Mar-15
90-day JPY/KRW Chart
10.20
(4)
10.00
9.80 – target on long position
9.80
10
2
9.6010
10
4
1
9.40
10
1
9.20 9
2
3
9
9.0613
5
5 9.00 – stop on long position
9.00
9
1RSI76 151 226 301 376 451 526 601 676 751 826 901 976 105111261201127613511426
9
9
15 8
070Oct 14 300Oct 14 210Nov 14 150Dec 14 070Jan 15 290Jan 15 20 0Feb 15 16 0Mar 15
JPYKRW has been creating a
zig-zag structure within a flat
channel. A move above the
recent high around 9.46
opens the way to further
upside, in our view. The risk
we see is that JPYKRW
continues to trade flat within
this channel.
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 26, 2015
FX Pulse
Strategic FX Portfolio Trade Recommendations
Evan Brown, Vandit D. Shah
EURNOK Entered: 8.62; Close: New York End-of-Day
USDNOK Entry: 7.48; Target; 8.30; Stop: 7.32
05-Mar-15
Hold:
Long
USD/ILS
Enter: 3.99; Target: 4.25; Stop: 3.90
105
-20
-30
100
Oil Sector Investment (YoY)
Projected to decline
-40
95
06 07 08 09 10 11 12 13 14 15 16
Korea Fighting Disinflationary Forces
Growth Stronger in Chile than Colombia
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
-100%
2008
-80%
-20%
2007
-15%
2006
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).
110
-10
2005
Enter: 4.10; Target: 4.28; Stop: 4.08
115
0
2004
05-Mar-15
120
10
2003
Hold:
Long
JPY/KRW
Our economists expect wages to rise in Japan with the cyclical
recovery well under way (see Video: Japan Economics: J-Insight:
Faster: Cyclical and Structural Reasons for the Acceleration of Wages
(16 Mar 2015)). Indeed, wages have already reached the highest
growth rate since 1998 (on a 12mma basis). Meanwhile, Korea is still
battling deflationary pressures. Weakness in the EUR has also
resulted in further unwanted KRW REER appreciation dampening the
macro outlook. For more, see EM FX Trades: Long JPY/KRW (16
Mar 2015).
125
20
2002
Enter: 9.28; Target: 9.80; Stop: 9.00
130
NOK trade weighted
index (rhs)
30
2001
12-Mar-15
40
2000
Close: Long
EUR/NOK
Limit Order:
Buy
USD/NOK
We have decided to close our current long EURNOK position as we
believe the EURUSD corrective rebound is approaching its end.
Despite near-term political uncertainty adding risk premium to oil, we
remain bearish on the broader Norwegian economy and look for a dip
to buy USD/NOK. We continue to see the second round effects of the
50% decline in oil prices bleeding into wage growth expectations
(Norges Bank: Falling Behind the Curve (19 March 2015). Norway
requires a weaker currency to improve competitiveness in the non-oil
economy. Our economists expect two more 25 bps cuts in May and
June, which is an earlier easing than the market anticipates. The key
risk to this trade is a more prolonged increase in the price of oil, which
would alleviate some pressure on Norway’s economy.
Norway Energy Investment to Get
Worse Before It Gets Better
BoI Steps Up Interventions
Although the Bank of Israel disappointed expectations in the market
for more easing, we believe that ILS should weaken over the medium
term given the focus that the BoI has placed on the currency. Recent
data show that the BoI is intervening more aggressively to manage the
ILS TWI weaker. Should the BoI be successful in steering market
expectations for more ILS weakness, 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.
11
MORGAN STANLEY RESEARCH
March 26, 2015
FX Pulse
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 last week adding to easing measures by
20 other central banks this year. Our ASEAN economics team thinks
Thailand has the most negative economic outlook within the region (See
Thailand Strategy & Economics: Most Vulnerable in ASEAN (March 25,
2015). As such, 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).
23-Feb-15
Enter: 2.4600; Take Profit: 2.555
Close:
Long
USD/TRY
12-Feb-15
Close:
Long
USD/PEN
12-Feb-15
Close:
Short
EUR/INR
THB REER Has Appreciated Sharply
Past CBT Easing Cycles
We took profit on our long USD/TRY, having 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.
Enter: 3.0690; Stopped: 3.0690
Peru REER Elevated; Trade Balance Down
We were stopped out of our long USD/PEN position on the dovish Fed
and rebound in commodity prices. Over the medium term, Peru’s
REER has room to adjust lower compared to Chile and other
currencies in LatAm. As such, we may look to re-establish in coming
weeks. For more, see Video | LatAm FX: Not There Yet (12 Mar
2015).
Enter: 71.05; Take Profit: 68.00
Macro Outlook Improving in India
We have taken profit on our short EUR/INR position and will look for
levels to re-establish in the coming weeks. 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. Post-the 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 recent parliamentary acts on raising FDI
limits further supportive. In contrast, we stay negative on EUR over the
medium-term on yield compression, reserve diversification and political
uncertainty. Increased bank lending and FX hedging only lead to
further EUR weakness.
Source for all charts: Bloomberg, Haver Analytics, Macrobond, Reuters EcoWin, Morgan Stanley Research
12
MORGAN STANLEY RESEARCH
March 26, 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 USD/PEN
$10.0mn
9.7%
12-Feb-15
3.0690 Stopped at 3.0690 on 24-Mar-15
$0.0k
-$70.4k
-$70.4k
Long USD/TRY
$10.0mn
9.7%
23-Feb-15
2.4600 Took profit at 2.5550 on 23-Mar-15
$371.8k
-$79.1k
$292.7k
Short EUR/INR
$10.0mn
9.7%
12-Feb-15
71.05 Took profit at 68.00 on 23-Mar-15
$429.8k
$84.1k
$514.0k
Long EUR/NOK
$10.0mn
9.7%
19-Mar-15
8.62 Close at NY Close on 26-Mar-15
-$19.4k
-$2.3k
-$21.8k
Long USD/THB
$10.0mn
9.7%
29-Jan-15
32.78
32.53
32.00
35.00
-$76.9k
-$50.0k
-$126.8k
Long USD/ILS
$10.0mn
9.7%
5-Mar-15
3.9940
3.9561
3.9000
4.2500
-$95.8k
$0.6k
-$95.2k
Long CLP/COP
$10.0mn
9.7%
5-Mar-15
4.10
4.12
4.08
4.28
$32.4k
-$7.3k
$25.1k
Long JPY/KRW
$10.0mn
9.7%
12-Mar-15
9.28
9.28
9.00
9.80
-$12.9k
-$5.0k
-$17.9k
7.48
7.88
7.32
8.30
$53.4mn
51.8%
Active Trades
Lim it Trades
Buy USD/NOK
Cash
Portfolio Mark to Market
$103.1mn
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 (26 Mar 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
0.88
3.18%
13
MORGAN STANLEY RESEARCH
March 26, 2015
FX Pulse
Click here for interactive currency
pages:
G10 Currency Summary
Dara Blume and Sheena Shah
USD
Taking a Breath
12.0%
US data remain soft as a result of seasonal factors and labor issues. On top of this, the Fed did not sound in a huge rush to
hike rates at the latest meeting. This combination could lead to a USD pause ahead of payrolls. Over this timeframe, we
prefer to play relative value trades and wait for dips in USD. However, we expect that growth will pick up and the Fed will hike,
so we retain our medium-term bullish USD view, and would use dips to re-establish longer-term long USD positions.
EUR
Remain Bearish
-11.2%
Bullish
Bearish
Watch: GDP, PCE, Consumer Confidence, ADP, ISM, Trade, Payrolls
Watch: Consumer Confidence, CPI, PMI
We remain bearish on EURUSD and believe that it may begin to head lower after its brief pause following the FOMC meeting.
Concerns about Greece remain and the latest round of European elections suggests a more fragmented political landscape,
which could be reflected in the outcome of national elections in many countries at the end of the year. Political uncertainty is
likely to weigh on EUR.
JPY
A Brighter Picture
- 0.2%
We believe that USDJPY has scope to head lower in the near term. First, risk appetite has weakened due to political tension in
the Middle East and valuation in equity markets. Second, we are seeing signs of reflation in Japan. Wages are picking up and
the economy is strengthening somewhat. The combination of these two factors should pressure USDJPY somewhat, with JPY
particularly attractive on the crosses.
GBP
CPI at 0.0%Y, Remain Bearish
- 3.9%
Over the coming week we continue to monitor EURGBP, expecting a technical correction higher. This is supported by low risk
appetite causing investors to reduce inflows into the UK, keeping the currency weak. With CPI reaching a low of 0.0%Y, there
is now an increasing risk that the UK dips into deflation in the coming months. While this supported retail sales, there could be
a shift in sentiment from the BoE, supporting the view to sell GBPUSD on rebounds. Political risks also remain.
CHF
Longer-Term CHF Weakness
- 1.2%
CHF has gained support relative to EUR in recent days, dropping below the 1.05 area. This could be around a level which
the SNB believes that the stronger currency could have a larger deflationary impact on the economy and therefore may
come in to intervene. Indeed, recent sight deposit data suggest that the SNB has not been in the market for weeks but
this is because CHF was weakening in its favor. We remain buyers of USDCHF on dips.
CAD
Watching Oil
Neutral
Watch: Wages, GDP, Manufacturing PMI
CAD is gaining some support from stronger oil prices, but we believe that this could be limited over the longer term. The
REER still requires adjustment in order to make the economy more competitive. While the dependence on the oil sector is
lower than in Norway, CAD could still get hit from a weaker banking sector affected by loans made to the oil sector. We do
note that Canada should benefit from growth in the US economy, but look for larger dips to buy USDCAD.
9.9%
Bullish
Bearish
Bearish
Watch: Industrial Production, Cash Earnings, Tankan
Watch: House Prices, Mortgage Approvals, GDP (F), PMI Manufacturing
Watch: KOF, PMI Manufacturing, Risk Appetite
AUD
Temporary Relief
- 4.3%
We remain bearish AUD over the medium term but recognize that the USD pause could provide some support to higheryielding currencies such as AUD. It may also offer a moment of relief for Asia, which would further support AUD.
However, over the medium term, we remain bearish. Our commodities team lowered its iron ore forecasts recently, not
boding well for the longer-term outlook for AUD.
NZD
A Tactical Rebound
- 5.5%
We see scope for NZD to head higher in the near term, given the temporary USD pause and some optimism on milk
prices. That said, NZD has encountered resistance around its 100 DMA, and for it to take another leg higher, it would
need to break meaningfully through this level. Even then, gains would likely be tactical, as we remain bearish over the
medium term.
SEK
Riksbank Puts Verbal Limit on EURSEK
10.9%
SEK could gain some mild support on the back of rising inflation expectations in the euro area, but we still expect the
Riksbank to object to excessive currency strength, and therefore believe that EURSEK could have a “verbal” floor around
9.00, with the central bank providing more easing via a rate cut or QE if EURSEK moves rapidly below here. EURSEK will
likely stay range-bound in the coming weeks, in our view.
NOK
Watching Oil Prices
7.4%
Bearish
Neutral
Bearish
Bearish
Watch: Private Sector Credit, Building Approvals, Trade
Watch: Building Permits, Business Confidence, M3
Watch: Retail Sales, Manufacturing PMI
Watch: Retail Sales, Norges Bank Daily FX Purchases, Manufact. PMI
Our longer-term outlook remains bearish on NOK but, in the coming week, given rising political risks, NOK could gain support
from rebounding oil prices. However, the economy is still too dependent on oil, and with investment in the industry expected to
put pressure on the growth outlook and a central bank expected to cut rates in coming months, there remain large downside
risks for NOK. This week we will be watching to see if Norges Bank increases its daily NOK purchases.
Charts show 3M performance against USD, as normally quoted and DXY for USD. Click on any currency for a reference webpage on Matrix.
14
MORGAN STANLEY RESEARCH
March 26, 2015
FX Pulse
EM Currency Summary
Jessica Liang (AXJ), Meena Bassily (CEEMEA), Felipe Hernandez and Dara Blume (LatAm)
-0.7%
CNY
Neutral
INR
Neutral
IDR
Bearish
0.7%
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.
0.7%
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.
- 0.2%
Declining inflation, weak exports and sluggish domestic growth has led BoK to lower 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.
0.5%
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. In the near term, USD/MYR will continue to track moves in oil prices.
1.0%
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.
0.1%
Given the sharp decline in inflation, we see room for one more rate cut from the BoT 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 has continued to narrow the gap to the floor at 27. We think it is far too early to expect the CNB to
remove the floor which they have said will stay in place well into 2016. As such we see good risk-reward adding
long EUR/CZK positions close to the floor.
HUF has traded well in line with recent improvement in EM sentiment. We are more cautious on the medium term
given the risk of higher bond market volatility driven by Fed risks as we approach the timing of the first rate hike,
which can cause large spikes higher in EUR/HUF. We also expect further NBH easing.
Although the BoI didn’t cut rates at the last meeting, it has continued to buy USD in line with its clear objective to
have a more competitive currency. With inflation falling we expect interventions to increase, and see an increased
risk of more non-conventional measures. As such, we stay long USD/ILS with a target at 4.25.
The PLN is likely to stay strong until the NBP signals a greater concern over the threat it could pose to the inflation
or growth outlook. We think we are still some way from this level. However we are cautious of building long PLN
positions in light of potential bond market volatility related to FOMC policy.
The CBR has continued to ease policy, however higher oil prices have allowed for RUB to perform more
resiliently. Still, with inflation near 17%Y and rising - real policy rates and real carry is now in negative territory,
therefore we see poor risk-adjusted returns on RUB.
There has been an improvement in the risks surrounding monetary policy, with the CBT having kept rates on hold
and there being a clear reduction in political commentary on interest rates. This removes some of the idiosyncratic
risks for the TRY; however, sensitivity to US rates remains high given Turkey’s high external financing needs.
ZAR remains sensitive to 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.
Despite the large moves in BRL seen thus far, we see scope for further weakness. BRL’s sell off has been due to
idiosyncratic concerns about Brazil, not simply the USD rally. Volatility remains very high in Brazil, which is
eroding support from the carry.
We see scope for outperformance from CLP as fundamentals have improved. CLP began its adjustment before
many other LatAm currencies, and as such, currency weakness and monetary accommodation have had more
time to boost growth.
The latest rebound in oil prices could offer support to COP, and if it continues COP could trade strong. However,
we note that over the medium term, COP does need to correct to adjust for the second round effects of oil
weakness already seen. Note that COP sold off recently even on days when oil picked up, highlighting this.
We remain constructive on MXN over the medium term. With the USD pause, MXN should be a relative
outperformer as it has the tailwinds of central bank intervention and rising oil prices. That said, once the USD rally
resumes, MXN could underperform given its high beta status and use as a proxy for the rest of EM.
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.
KRW Bearish
MYR Neutral
PHP
Neutral
THB
Bearish
CZK
Neutral
HUF
Bearish
ILS
Bearish
PLN
Neutral
RUB
Neutral
TRY
Bearish
ZAR
Bearish
BRL
Neutral
CLP
Neutral
COP
Bearish
4.1%
2.2%
0.0%
2.1%
- 9.3%
5.5%
4.3%
13.3%
0.1%
2.5%
1.1%
MXN Bullish
- 0.4%
PEN
Bearish
Despite the domestic growth slowdown, we expect the PBoC to manage excess volatility in RMB. Looking ahead,
we anticipate a stable path for CNY.
Charts show 1M performance against USD, as normally quoted
15
MORGAN STANLEY RESEARCH
March 26, 2015
FX Pulse
Global Event Risk Calendar
Charles Rubenfeld
Date
Day
27-Mar
Fri
29-Mar
Sun
30-Mar
Mon
31-Mar
01-Apr
Time
(Ldn)
Ccy
Event
08:45
09:00
09:00
N/A
08:30
10:30
12:30
14:00
19:45
GBP
NOK
NOK
NOK
SEK
SEK
USD
USD
USD
BoE's Carney spks (Frankfurt)
Retail Sales (MoM)
Unemployment Rate
Norges Bank's Olsen spks (New York)
Retail Sales (MoM)
Riksbank's Ingves spks (Frankfurt)
GDP (QoQ)
Univ. of Michigan Confidence
Fed's Yellen (voter) spks (San Francisco, CA)
19:00
EUR
Second Round of French Departmental Elections
23:30
13:30
08:00
08:00
N/A
10:00
13:00
09:30
00:50
13:30
13:30
13:30
15:00
15:30
AUD
CAD
CHF
CHF
CLP
EUR
EUR
GBP
JPY
USD
USD
USD
USD
USD
Consumer Confidence
Industrial Product Price (MoM)
KOF Leading Indicator
SNB Sight Deposits
Central Bank 1Q monetary policy report (IPOM)
Consumer Confidence
German CPI (YoY)
Mortgage Approvals
Industrial Production (MoM)
Personal Income
Personal Spending
PCE Core (YoY)
Pending Home Sales (MoM)
Dallas Fed Manufacturing Activity
01:30
N/A
13:30
13:30
10:00
10:00
00:05
09:30
09:30
02:30
03:00
N/A
14:00
14:45
15:00
AUD
BRL
CAD
CAD
EUR
EUR
GBP
GBP
GBP
JPY
NZD
RON
USD
USD
USD
Private Sector Credit (MoM)
Central Bank Quarterly Inflation Report
Average Weekly Earnings (YoY)
GDP (MoM)
Unemployment Rate
CPI Estimate (YoY)
GfK Consumer Confidence
Current Account Balance
GDP (QoQ)
Labor Cash Earnings (YoY)
M3 (YoY)
BNR Rates Decision
S&P/CaseShiller Home Price Index
Chicago PMI
Consumer Confidence Index
01:30
06:30
14:30
08:30
02:00
02:45
09:00
09:30
00:50
08:00
N/A
07:30
13:00
13:15
15:00
15:00
N/A
AUD
AUD
CAD
CHF
CNY
CNY
EUR
GBP
JPY
NOK
NZD
SEK
USD
USD
USD
USD
USD
Building Approvals (MoM)
Commodity Index (YoY)
PMI Manufacturing
Manufacturing PMI
Manufacturing PMI
PMI Manufacturing
PMI Manufacturing
PMI Manufacturing
Tankan Large Manufacturing Index
Manufacturing PMI
Global Dairy Trade Announces Milk Auction Results
Manufacturing PMI
Fed's Yellen (voter) spks (Washington D.C)
ADP Employment Change
Construction Spending (MoM)
ISM Manufacturing
Total Vehicle Sales
Ref.
Period
MS forecast
Market
Previous
Feb
Mar
0.5%
3%
-0.7%
3%
Feb
0.25%
1.16%
2.4%
92
2.2%
91.2
0.5%
111.4
-0.4%
90.1
4Q T
Mar F
2.2%
Feb
Mar
Mar F
Mar P
Feb
Feb P
Feb
Feb
Feb
Feb
Mar
0.2%
0.3%
0.3%
0.2%
0.7%
-9.5
-3.7%
0.1%
60.786
3.7%
0.3%
-0.2%
1.3%
1.68%
-11.2
Tue
Feb
0.6%
Jan
Jan
Feb
Mar
Mar
4Q
4Q F
Feb
Feb
2%
0.3%
11.2%
-0.3%
1
-27.008
0.5%
1.3%
6.2%
2.25%
173.02
45.8
96.4
Jan
Mar
Mar
2%
2%
96
52.4
96.25
Wed
Feb
Mar
Mar
Mar
Mar
Mar F
Mar F
Mar
1Q
Mar
14
Mar
Mar
Feb
Mar
Mar
7.9%
-20.6%
48.7
47.3
49.9
49.2
51.9
54.1
12
51.2
53.3
-.7%
52.2
225k
0%
52.5
16.65m
211.8k
-1.1%
52.9
16.16m
16
MORGAN STANLEY RESEARCH
March 26, 2015
FX Pulse
Date
02-Apr
03-Apr
06-Apr
07-Apr
08-Apr
09-Apr
10-Apr
15-Apr
15-Apr
29-Apr
29-Apr
29-Apr
07-May
18-Jun
Day
Thu
Time
(Ldn)
01:30
13:30
09:30
13:30
13:30
15:00
Ccy
Event
Ref.
Period
Feb
Feb
Mar
MS forecast
AUD
CAD
GBP
USD
USD
USD
Trade Balance
Trade Balance
PMI Construction
Initial Jobless Claims
Trade Balance
Factory Orders
Feb
Feb
-41.5B
02:45
07:30
13:30
13:30
CNY
SEK
USD
USD
PMI Composite
PMI Services
Change in Nonfarm Payrolls
Unemployment Rate
Mar
Mar
Mar
Mar
15:00
12:30
06:00
15:00
15:00
CAD
CLP
JPY
USD
USD
Ivey PMI
Central Bank Meeting Minutes
Leading Index CI
Labor Market Conditions Index
ISM Non-Manufacturing Composite
Mar
49.7
Feb P
Mar
Mar
105.5
4%
56.9
02:30
05:30
08:00
09:00
09:30
06:30
07:30
08:30
15:00
15:00
AUD
AUD
CHF
EUR
GBP
INR
SEK
SEK
USD
USD
Retail Sales (MoM)
RBA Rates Decision
SNB Sight Deposits
PMI Services
PMI Services
RBI Rates Decision
PMI Services
Industrial Production (MoM)
IBD/TIPP Economic Optimism
JOLTs Job Openings
00:30
08:15
10:00
00:01
00:50
04:00
N/A
N/A
19:00
AUD
CHF
EUR
GBP
JPY
JPY
JPY
JPY
USD
Consumer Confidence
CPI (YoY)
Retail Sales (MoM)
BRC Shop Price Index (YoY)
Trade Balance BoP Basis
BoJ Press Conference
BoJ Rates Decision
Eco Watchers Survey Outlook
FOMC Minutes
13:30
09:30
12:00
N/A
15:00
08:30
13:30
15:00
CAD
GBP
GBP
KRW
MXN
SEK
USD
USD
Building Permits (MoM)
Visible Trade Balance GBP/Mn
BoE Rates Decision
BoK Rates Decision
Central Bank Monetary Policy Minutes
Household Consumption
Initial Jobless Claims
Wholesale Inventories (MoM)
Feb
Feb
Feb
1.9
291k
0.3%
CAD
CAD
CAD
CHF
CNY
GBP
NOK
NOK
PEN
Housing Starts
Unemployment Rate
Employment Change
Unemployment Rate
CPI (YoY)
Industrial Production (MoM)
Industrial Production (MoM)
CPI Underlying (YoY)
BCRP Rates Decision
Mar
Mar
Mar
Mar
Mar
Feb
Feb
Mar
Apr
3.25%
156k
6.8%
-1k
3.5%
1.4%
-0.1%
-3%
2.4%
3.25%
EUR
CAD
SEK
USD
NZD
NOK
CHF
ECB Rates Decision
BoC Rates Decision
Riksbank Rates Decision
FOMC Rate Decision
RBNZ Rates Decision
Norges Bank Rates Decision
SNB Rates Decision
Apr
Apr
Apr
Apr
Apr
May
Jun
0.05%
0.75%
-0.25%
0.125%
3.50%
1.0%
-0.75%
Market
Previous
290k
-41B
0.5%
-980m
-2.45B
60.1
291k
-41.8B
-0.2%
250k
5.5%
51.8
56.7
295k
5.5%
-1.8B
Fri
195k
5.6%
Mon
Tue
Feb
2.25%
2.25%
Mar F
Mar
0.4%
2.25%
Mar
Feb
Apr
Feb
54.3
56.7
7.5%
56.7
0.96%
49.1
5m
Mar
Feb
Mar
Feb
111.4
-0.8%
1.1%
-1.7%
¥-864.2B
7.5%
Wed
0.1%
0.1%
Mar
0.1%
53.2
Thu
0.5%
1.75%
0.5%
Feb
290k
-12.9%
£-8412
0.5%
1.75%
Fri
13:15
13:30
13:30
06:45
02:30
09:30
09:00
09:00
00:00
Upcoming Risk Events
12:45
15:00
08:30
19:00
22:00
9:00
8:30
0.05%
0.125%
3.50%
0.05%
0.75%
-0.25%
0.125%
3.50%
1.25%
-0.75%
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
17
MORGAN STANLEY RESEARCH
March 26, 2015
FX Pulse
Click here for interactive charts
G10 FX Tactical Indicators
Charles Rubenfeld
Exhibit 1
Exhibit 2
Historical Currency Performance
FXVIX (FX Volatility Index)
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
13.0
12.0
11.0
10.0
9.0
8.0
7.0
DXY NZD AUD CAD JPY CHF SEK NOK EUR GBP
Monthly
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
-5
-2
-10
CHF
NOK
EUR
NZD
AUD
Current
SEK
JPY
CAD
USD
GBP
-3
-4
Last week
-5
Mar-14
Source: Bloomberg, Morgan Stanley Research
May-14
Jul-14
Sep-14
Nov-14
Jan-15
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)
102
CHF
99
NZD
96
MXN
93
AUD
90
CAD
87
GBP
84
JPY
EUR
81
78
Jan-14
-28 -26 -24 -22 -20 -18 -16 -14 -12 -10 -8
Mar-14
May-14
Jul-14
Source: Bloomberg, Morgan Stanley Research
Sep-14
Nov-14
Jan-15
-6
-4
-2
2
Mar-15
Note: Aggregate USD positioning in nominal terms, see appendix for details.
Source: Bloomberg, Morgan Stanley Research
18
MORGAN STANLEY RESEARCH
March 26, 2015
FX Pulse
Click here for a full positioning history
Morgan Stanley FX Positioning Tracker
Calvin Tse, Sheena Shah
Overall Score
This
Week

Component Scores
Last
Week

USD
-2
-2
EUR
-1
-1
JPY
4
3
GBP
-3
-4
CHF
5
4
CAD
-2
-3
AUD
2
2
NZD
-4
-4
NOK
4
4
SEK
-2
-2
Short
Neutral
Long
-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2
3 4 5 6 7 8
9 10


 
 
 
 




MS
Flow
IMM
TFX
Beta
ETF
Sentiment
-9
6
-9
4
-2
-2
USD
6
-10
-3
-6
7
0
EUR
9
10
8
-1
5
-4
JPY
-10
-5
2
-5
4
-7
GBP
9
4
6
0
CHF
-6
-2
4
-4
CAD
9
1
-3
4
-1
AUD
-8
-6
-5
1
0
Toshin
-1

Since Monday, March 23, positioning in
currencies has shifted. The largest shorts
are in NZD and GBP. The largest longs
are in CHF and JPY.

USD long positioning was unchanged.
Global macro hedge funds modestly
added to longs, but sentiment turned
bearish.

JPY long positioning was increased. This
was driven by buying from global macro
hedge funds and a reduction in bearish
sentiment.

We will provide a full updated report and
refresh positioning scores for all of our
underlying sub-indicators on Monday.
NZD
6
2
NOK
-8
5
SEK
For methodology, see Appendix.
Tactical Rich and Cheap Fair Value Model
AUD
CAD
CHF
EUR
GBP
JPY
NOK
NZD
SEK
Spot Fair Value Z-Score
0.78
0.78
0.06
1.26
1.27
1.71
0.98
0.97
-0.05
1.08
1.23
-3.39
1.50
1.51
-3.02
120.04
120.74
0.22
8.02
6.79
-5.24
0.76
0.71
1.99
8.62
7.67
-8.91
TRAC Trade Exp. App.
Short
-0.01%
Short
-0.98%
Neutral
0.05%
Long
13.50%
Long
0.67%
Neutral
-0.58%
Long
18.18%
Short
-6.06%
Long
12.36%
BRL
CLP
COP
HUF
ILS
IDR
INR
KRW
MYR
MXN
PHP
PLN
RUB
SGD
THB
TRY
ZAR
Spot Fair Value
3.23
3.39
633
624
2,573
2,409
303
307
4.04
3.73
13,124
13,568
62.47
62.50
1,123
1,096
3.73
3.32
15.06
15.08
44.95
44.27
4.13
4.19
59.29
67.46
1.38
1.37
32.56
32.59
2.57
2.53
12.02
11.44
Z-Score
1.49
-0.69
-1.90
0.74
-3.92
2.22
0.32
-0.65
-3.99
1.12
-1.38
0.94
0.44
-0.41
0.44
-1.60
-2.44
TRAC Trade Exp App
Short
-4.83%
Neutral
1.36%
Long
6.81%
Short
-1.11%
Long
8.34%
Short
-3.27%
Short
-0.05%
Long
2.41%
Long
12.37%
Short
-0.19%
Long
1.55%
Neutral
-1.34%
Neutral -12.11%
Long
0.32%
Short
-0.09%
Long
1.76%
Long
5.09%
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 23, 2015.
19
MORGAN STANLEY RESEARCH
March 26, 2015
FX Pulse
Central Bank Watch
Next rate
Market
MS
decision
expects (bp)
expects (bp)
US
29 Apr
0
0
Euro Area
15 Apr
-2
Japan
08 Apr
0
UK
09 Apr
Current
Morgan Stanley Forecasts
1Q15
2Q15
3Q15
4Q15
0.125
0.125
0.125
0.125
0.125
0
0.05
0.05
0.05
0.05
0.05
0
0.10
0.10
0.10
0.10
0.10
0
0
0.50
0.50
0.50
0.50
0.50
Canada
15 Apr
-5
0
0.75
0.75
0.75
0.75
0.75
Switzerland
18 Jun
-10
0
-0.75
-0.75
-0.75
-0.75
-0.75
Sweden
29 Apr
-2
0
-0.25
-0.25
-0.25
-0.25
-0.25
Norway
07 May
-
-25
1.25
1.25
0.75
0.75
0.75
Australia
07 Apr
-15
0
2.25
2.25
2.00
1.75
1.75
New Zealand
29 Apr
-2
0
3.50
3.50
3.50
3.50
3.50
Russia
30 Apr
-
-50
14.00
13.00
12.00
11.00
Poland
15 Apr
5
0
14.00
00
1.50
1.50
1.50
1.50
1.50
Czech Rep
07 May
-3
0
0.05
0.05
0.05
0.05
0.05
Hungary
21 Apr
-12
-15
1.95
1.95
1.50
1.50
1.50
Romania
31 Mar
-
-25
2.25
2.00
1.75
1.75
1.75
Turkey
22 Apr
-
-25
7.50
7.50
7.25
7.25
7.25
Israel
27 Apr
-1
0
0.10
0.10
0.10
0.10
0.10
South Africa
21 May
19
0
5.75
5.75
5.75
6.00
6.00
Nigeria
24 Mar
-
0
13.00
13.00
14.00
14.00
14.00
Ghana
01 Apr
-
0
21.00
21.00
21.00
21.11
20.00
5.35
5.35
5.10
5.10
5.10
7.50
7.50
7.00
6.75
6.50
China
-
-
India
07 Apr
Hong Kong
S. Korea
-
-
-25
17 Apr
-
0
0.5
0.5
0.5
0.5
0.5
09 Apr
0
0
1.75
1.75
1.75
1.75
1.75
Taiwan
24 Jun
-
0
1.875
1.875
1.875
1.875
1.875
Indonesia
14 Apr
-
0
7.50
7.5
7.25
7
6.75
Malaysia
07 May
-
-25
3.25
3.25
3
2.75
2.75
Thailand
29 Apr
-4
-25
1.75
1.75
1.5
1.5
1.5
Brazil
29 Apr
56
50
12.75
12.75
13.5
13.5
12.5
Mexico
26 Mar
0
0
3
3
3
3
3.5
Chile
16 Apr
-4
0
3
3
2.75
2.75
2.75
Peru
09 Apr
-
0
3.25
3.25
3
3
3.25
Colombia
24 Apr
-1
0
4.5
4.5
4.5
4.5
4.5
Source: National Central Banks, Morgan Stanley Research forecasts as of March 18; Note: Japan policy rate takes a mid-range value. Market expects for G10 as of March 18. 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
India
20
4
15
3
2
10
1
5
0
2002
2004
2006
2008
Source: Morgan Stanley Research, Haver Analytics
2010
2012
2014
0
2002
2004
2006
2008
2010
2012
2014
Source: Morgan Stanley Research, Haver Analytics
20
MORGAN STANLEY RESEARCH
March 26, 2015
FX Pulse
FX Bull/Bear Projections
EURUSD
EUR/USD
1.50
USDJPY
USD/JPY
140
MS Forecast
MS Forecast
130
1.40
120
1.30
110
1.20
100
1.10
90
1.00
0.90
Jun-12
80
Jun-13
Jun-14
Jun-15
70
Jun-12
Jun-15
USD/CAD
1.43
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
1150
34
1.30
1050
Jun-15
900
Jun-12
30
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
31
EURPLN
EUR/PLN
4.45
Jun-13
32
950
Jun-14
MS F orecast
33
1000
1.25
Jun-15
USDTHB
USD/THB
36
35
1100
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
1.35
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
USD/MXN
17.50
MS F orecast
Jun-14
Jun-15
USDCLP
USD/CLP
710
MS F orecast
MS F orecast
16.50
660
15.50
610
14.50
560
13.50
510
12.50
Jun-13
Jun-14
Jun-15
11.50
Jun-12
Jun-13
Jun-14
Jun-15
460
Jun-12
Jun-13
Jun-14
Jun-15
Source for all charts: Morgan Stanley Research, Bloomberg; shaded area is the range of market forecasts.
21
MORGAN STANLEY RESEARCH
March 26, 2015
FX Pulse
Click here for custom cross forecasts
Morgan Stanley Global Currency Forecasts
 We updated most of our G10 and EM forecasts on January 22, 2015. AUDUSD and NZDUSD were updated on February 5, 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
119
1.49
0.95
8.47
7.78
1.24
0.79
0.76
131
0.74
1.05
9.33
8.57
6.21
7.75
13018
62.7
1108
3.66
44.7
1.36
31.3
32.5
3.2
14.97
8.8
6.3
619
2542
3.1
11.9
2.59
3.94
56.7
4.19
27.8
314
4.41
95.62
102.49
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
0.0
1.6
-8.0
5.1
3.2
9.3
6.3
-6.8
-7.1
1.8
8.7
-0.9
3.7
9.4
-2.1
0.4
0.0
-1.2
7.6
3.8
3.5
0.0
1.6
2.1
-4.0
2.0
9.6
-60.0
3.5
0.0
0.0
1.9
-3.8
1.0
5.2
5.8
1.5
5.2
1.1
3.6
-1.3
-5.2
7.5
-7.5
8.4
7.4
13.3
8.4
-11.2
-12.8
2.0
2.6
2.8
1.9
7.4
-3.5
0.6
-5.0
-5.1
10.8
2.6
3.9
2.0
4.9
3.8
-15.8
-1.1
9.2
122.5
4.1
-0.7
0.0
-0.9
-8.9
5.7
15.2
5.3
2.1
7.4
0.5
6.6
-1.1
Source: Morgan Stanley Research
22
MORGAN STANLEY RESEARCH
March 26, 2015
FX Pulse
Appendix
The Strategic FX Portfolio Trade Recommendations page presents the portfolio of tactical trade ideas of the FX Strategy team and the
performance of this portfolio over time.
Strategic FX Portfolio Trade Recommendations (Note: The portfolios represent hypothetical not actual investments.)
 On 10 June, 2010, we implemented changes to our portfolio to make it more robust and to better reflect our confidence levels and
relative risk. A detailed explanation of this change can be found in “Portfolio Methodology Update” (10 June 2010).
 In summary, the trades and the weightings are primarily reviewed weekly on Thursdays and published in the Pulse. However, if we
think there has been a material change to the risk-reward, we will make intraweek changes. We monitor trades daily. We will continue
to publish the portfolio as a list of trades where our strongest conviction ideas will be given the largest weightings. We will, however,
also adjust the weights of trades in order to manage our risk exposure.
 A table showing the trade, trade weight, trade entry date, risk allocation and levels for (average) entry, current, stop and target will be
shown in the Strategic FX Portfolio Trade Recommendations section of the FX Pulse.
 If we increase the weighting allocated to a trade, the entry level published in the table will be changed to reflect a proportionally
weighted rate of the initial entry level and the entry level on the date the weight was increased.
Performance Statistics
 We rebalance our portfolio daily at the NY close to keep the weight of each trade consistent with the published weight.
 We will primarily enter and exit trades using the bid or offer rate of the WMR fixing. If we make an intraday change to our portfolio, we
will cite the closest Bloomberg half hourly fix in our published note and enter/exit at this rate.
 Stops or targets will be triggered if the stated level is met at the WMR fix.
 Returns shown include the cost of carry using the 1W interbank deposit rate if this is quoted liquidly but do not include any other
expenses, slippage or fees and no interest on cash holdings are included. Reported returns are not levered.
 We have re-estimated our returns from 22 June 2006 to 10 June 2010, when we re-launched the portfolio, to take into account our
more robust calculation technique.
 We provide a monthly breakdown of our historical portfolio performance back to Jan 2005 in the Strategic FX Portfolio section of the
Pulse.
The FX Tactical Indicators table highlights the most recently updated indicators we, as a research team, use as inputs to generate both
longer and more tactical forecasts. Matrix charting codes are given in brackets. Change the G10 currency in italics as required.
•Historical Currency Performance: Price changes in currency over the past week and past month. (EURUSD)
•FXVIX (Volatility Index): An index of 3 month implied volatility calculated using 30 G10 and EM crosses (MSFXVIX)
•Relative Momentum Indicator: Measures the momentum of a currency relative to all other currencies; not indicative of historical
performance. (MSRMUS)
•MS GRDI*: An index to assess risk sentiment. It looks at ten different asset classes to gauge risk demand. The GRDI index seen in the
graph is a standardized reading of the index based on the 365-day rolling average. (GRDIIDX)
•G10 Surprise Index: Measures the performance of actual economic data in G10 countries relative to expectations. G10 Average Index
is a simple index; G10 GDP weighted average is based on GDP weights. (MSSIUSD)
•IMM Commitment of Traders Report: The “Aggregate USD Index” is the cumulative aggregate positioning of currencies we track on
the IMM against the USD. We combine IMM positioning on the AUD, CAD, CHF, EUR, GBP, JPY, and MXN to calculate an aggregate
USD index to measure overall net positioning. (MSPIUS)
FX Positioning Tracker Methodology (MSPIUS) See the primer
•MS Flow - Our internal flow data track all spot and forward trades transacted by Morgan Stanley FX globally.
•IMM - We use the US Commodity Futures Trading Commission’s IMM report to track positioning of non-commercial traders.
•Toshin - The Toshin accounts are Japanese foreign currency investment trusts that seek yield abroad. They typically cater to retail investors and
offer a higher return by investing in foreign assets on a currency un-hedged basis.
•TFX - The Tokyo Financial Exchange (TFX) measures Japanese currency trading on margin accounts, and comprises an estimated 10% of the
retail margin market.
•Beta - As an alternative proxy for positioning, our Beta-Tracker measures one-month rolling betas of currency managers’ and global macro
hedge funds’ daily returns on major currency indices.
•Sentiment - The Daily Sentiment Index gathers opinions on all active US futures, eurozone interest rates, and eurozone equities futures markets.
Morgan Stanley Tactical Rich and Cheap Model methodology: See the full report (EURTRAC)
Historic data for all these models can be found on the Morgan Stanley Matrix Platform. See New FX Strategy Interactive Features
(January 17, 2014). Click on the Matrix logo throughout this document or here for a G10 currency reference page:
* US Pat. No. 7,617,143.
23
MORGAN STANLEY RESEARCH
March 26, 2015
FX Pulse
Global FX Strategy Team
Head of Global FX Strategy (London)
Hans Redeker, Managing Director
[email protected]
(44 20) 7425 2430
Co-Head of US FX Strategy (New York)
Co-Head of US FX Strategy (New York)
Currency Strategist (New York)
Currency Strategist (New York)
Evan Brown, CFA, Vice President
Calvin Tse, Vice President
Dara Blume, Associate
Charles Rubenfeld, Analyst
[email protected]
[email protected]
[email protected]
[email protected]
(212) 761 2786
(212) 296 5423
(212) 296 5786
(212) 296 5911
Head of European FX Strategy (London)
Currency Strategist (London)
Currency Strategist (London)
Ian Stannard, Executive Director
Sheena Shah, Analyst
Vandit D. Shah, Analyst
[email protected]
[email protected]
[email protected]
(44 20) 7677 2985
(44 20) 7677 6457
(44 20) 7425 3978
Head of Asia FX and Rates Strategy (Hong Kong)
AXJ FX Strategy (Hong Kong)
Rates/FX Strategist (Hong Kong)
AXJ Strategy (Hong Kong)
Geoffrey Kendrick, Executive Director
Jessica Liang, Vice President
Kewei Yang, Executive Director
Kritika Kashyap, Associate
[email protected]
[email protected]
[email protected]
[email protected]
(852) 2239 7399
(852) 3963 3021
(852) 3963 0562
(852) 2239 7179
LatAm Macro Strategy (New York)
LatAm Local Rates Strategy (New York)
Felipe Hernandez, Vice President
Robert Habib, Associate
[email protected]
[email protected]
(212) 296 4996
(212) 761 1875
Global EM Macro Strategy (London)
CEEMEA Macro Strategy (London)
James Lord, Executive Director
Meena Bassily, Associate
[email protected]
[email protected]
(44 20) 7677 3254
(44 20) 7677 0031
Morgan Stanley entities: London – Morgan Stanley & Co. International plc; New York – Morgan Stanley & Co. LLC; Hong Kong – Morgan Stanley Asia Limited.
24
MORGAN STANLEY RESEARCH
March 26, 2015
FX Pulse
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