Morgan Stanley’s FX forecasts for 2018

Morgan Stanley are out with their 2018 Global Strategy Outlook

The guys and girls over at Morgan Stanley have put together their thoughts for 2018. Here’s a look at their FX forecasts first.

Numbers are Q1-4 2018 & 2019

EURUSD 2018 1.20/1.23/1.18/1.17. 2019 1.20/1.28/1.31/1.33
USDJPY 2018 114/112/108/105. 2019 102/100/96/93
GBPUSD 2018 1.25/1.30/1.27/1.24. 2019 1.27/1.30/1.32/1.35
USDCAD 2018 1.28/1.27/1.33/1.38. 2019 1.40/1.39/1.38/1.36
EURGBP 2018 0.96/0.95/0.93/0.94. 2019 0.94/0.98/0.99/0.99
AUDUSD 2018 0.76/0.77/0.72/0.67. 2019 0.65/0.68/0.69/0.70
NZDUSD 2018 0.68/0.68/0.64/0.61. 2019 0.63/0.64/0.68/0.70

Along side their global outlook report, they’ve also just brought out their Top 10 FX trades for 2018, which will go nicely with some of these forecasts.

Long USD/CAD
Widening interest rate differentials and debt worries in Canada.
Long EUR/NOK
Evolving away from selling oil to the world, and moderating housing market.
Short CHF/JPY
An accommodative SNB and widening inflation differentials with Japan.
Short USD/JPY
BoJ shifting its yield curve control and Japanese repatriation.
Long EUR vs. AUD, NZD basket
High leverage and weakening housing markets vs. strong growth in EMU.
Long CLP/MXN
Mexican election and NAFTA uncertainty are likely to weigh on MXN.
Long PLN/HUF
Monetary policy divergence plus growth dynamics suggest PLN outperformance.
Short USD/MYR
Pick-up in growth, cheap valuations, higher oil prices and policy normalization.
Short AUD vs. KRW, TWD basket
Policy divergence and strong exports helping TWD and KRW.
Long IDR/PHP
IDR valuation and carry is attractive. PHP stays weak, given its twin deficit.

The big theme in the forecasts is USD weakness but there’s also big nod to JPY strength;

Bottom line: The USD bull trend of 2011-16 was driven more by external than domesticfactors. With global growth now robust and synchronized, the high real returns andhealthy balance sheets in EM should attract capital from the traditional funding hubslike USD. USD should remain on a bearish trajectory, though waning risk sentiment in2H18 should offer a temporary respite in the depreciation trend. The successful globaland domestic reflation will likely prompt the BoJ to begin contemplating tightening,rendering JPY ready to strengthen.

Not that I’m one for picking price levels one or two years in advance as I have enough trouble picking the next pip now but I’m certainly behind their weaker USD and stronger JPY theme over next year. The Fed is normalising so there’s little excitement to buy the buck on future hikes and the BOJ’s monetary policy stance is going to be firmly in the crosshairs next year.

Do you agree or disagree with their forecasts?