fxpulse 20141002 morgan stanley

For important disclosures, refer to the Disclosures Section, located at the end of this report. MORGAN STANLEY RESEARCH Global Currency Research Team For research analysts, please see contact list at the back of this material. Global October 2, 2014 Currencies FX Pulse Revising USD Higher FX Forecast Changes: We have revised our USD forecasts higher. We had forecast a broadening of the USD rally across the currency spectrum, a trend we still expect to continue. But now we expect the pace of USD gains to accelerate. Hence, we have taken our USD forecasts higher through the remainder of this year and next. However, USD/JPY is one place where we expect USD gains to be moderate, especially as challenges to global risk appetite increase. Relative JPY strength is a likely result of increased asset market volatility. To capture this dynamic, we recommend short CAD/JPY positions. Bearish Commodity Currencies: Our most significant forecast changes are for the commodity-related currencies. The negative spillover from a higher USD onto the broader risk picture has developed more rapidly than initially expected. We look for AUD/USD to reach 0.76 and NZD/USD 0.67 by end-2015. We add a short AUD/CLP strategy to our portfolio as a relative-valuation trade. ECB Issues: The ECB disappointed currency markets by providing no guidance regarding the size of its asset- purchase programmes. Draghi also attempted to play down the emphasis placed on the extent of balance-sheet expansion. While this may take some steam out of the EUR’s declines, we still expect a sustained EUR/USD downtrend. We have taken our EUR/USD forecast down to 1.12 for end-2015. In This Week’s Edition We believe the ECB policy measures will have a direct negative impact on the EUR, and we detail the various channels through which the EUR is likely to be pressured. Portfolio outflows, hedging activity and bank lending are all set to drive the EUR lower, in our view. Hence, we reiterate our bearish EUR/USD view, but also expect EUR to come under pressure on many of the crosses. Previously supportive portfolio flows for the AUD have come to a halt, and declining commodity prices imply a further deterioration of Australia’s terms of trade. We explain our AUD forecast downward revision in detail. Closed Trades Long USD/NOK Active Trades Entry Stop Target Long USD v EUR CHF and SEK* 100.00 100.00 106.00 Short EUR/USD 1.2920 1.2840 1.2000 Short NZD/USD 0.8150 0.8140 0.7650 Long USD/SGD 1.27 1.25 1.32 Short EUR/INR 78.50 78.50 75.00 Short SEK/JPY 15.05 15.50 14.50 Long GBP/NZD 2.0440 1.9970 2.2600 Short EUR/NOK 8.1135 8.2200 7.7500 Limit Orders Entry Stop Target Buy USD/TRY 2.2450 2.2000 2.3300 Sell CAD/JPY 97.80 98.80 92.80 Sell AUD/CLP 528.0 534.6 500.0 Options Trade Entry Expiry Strike Long USD Put/JPY Call 24-Jul-14 24- Oct-14 1 00 Closed at 6.4228 on 30-Sep-14 See page 14 for more details. Changes in stops/targets in bold italics. MS Major Currency Forecasts 4Q14 1Q15 2Q15 3Q15 EUR/USD 1.24 1.22 1.18 1.14 USD/JPY 108 109 110 112 GBP/USD 1.60 1.63 1.60 1.56 USD/CHF 0.99 1.04 1.08 1.14 USD/CAD 1.14 1.16 1.18 1.20 AUD/USD 0.84 0.82 0.80 0.78 NZD/USD 0.76 0.74 0.71 0.69 EUR/JPY 134 133 130 128 EUR/GBP 0.78 0.75 0.74 0.73 EUR/CHF 1.23 1.27 1.28 1.30 EUR/SEK 9.30 9.20 9.10 9.00 EUR/NOK 8.05 8.10 8.15 8.20 Note: Forecasts for end-of-period. G10 forecasts updated October 2, 2014 FX Market Overview P2 EUR: A New Bearish Regime P6 AUD: The Facts Are Changing P10 Technical Chart of the Week – EUR/USD P13 Strategic FX Portfolio Trade Recommendations P14 G10 & EM Currency Summary P18 Global Event Risk Calendar P20 MS FX Positioning Tracker P23 Macro Forecasts P24 FX Forecasts P26

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