Morgan Stanley on USD, EUR, JPY, GBP

USD: We remain bearish on USD and see it as a funding currency along with CHF, JPY, and GBP. Weaker inflation data were counterbalanced by very strong retail sales figures. The goldilocks narrative of strong growth with low inflation should keep the USD weaker as it is used to fund trades in high-carry currencies like MYR and INR, and better growth stories like EUR. The FOMC minutes and comments from President Dudley indicated that the Committee is not concerned with financial conditions, which will further keep the policy normalization process gradual and thus USD weak.

EUR: We remain bullish on EUR, seeing EURUSD advance towards 1.25 by 1Q18. Markets are focused on ECB Draghi's speeches in the upcoming week, but ECB sources have suggested in media reports that he will not deliver a new policy message at Jackson Hole, taking risks of a policy surprise out of the equation. The ECB minutes also support the idea that the central bank is happy with the current level of the EUR. Therefore, EUR should see more upside as risk appetite stays supported, European economies' growth outperform, EMU political risks are reduced, and markets hope for a more integrated fiscal and banking union.

JPY: We are generally bearish on JPY, which should underperform the rest of G10 save for CHF. Abating geopolitical tensions with North Korea and better-than-expected US data pushed USDJPY higher from the 109.50 support level. Key levels of resistance include 111.30/40 and 112.50. Japanese GDP printed well above expectations at 4% and trade data were solid. Continued positive economic performance, coupled with the BoJ keeping nominal yields low, should support inflation and in turn reduce real yields. We expect foreign investment out of Japan to continue, further weighing on JPY.

GBP: Risk/reward still favors GBP downside, in ourview. GBPUSD upside should be limited to 1.31, but a break of 1.28 may confirm that the uptrend has been broken, opening the door to further weakness. While UK retail sales showed a slight upside surprise, we view this as adding to the potential downside in the future from a slowdown in consumption, as negative real wage growth weighs on consumer spending. Political risks may also rise as we approach the October Tory Party Conference, as Party members have expressed split opinions on the UK's Brexit position. We continue to see value in being short GBPSEK.

18 Aug 2017 - 11:01- Fixed IncomeBank Speaker- Source: Morgan Stanley

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