Optimism short-lived. Any optimism generated by the agreement between Merkel and Sarkozy on a common proposal regarding the future fiscal governance of the eurozone ahead of the EU Summit appears to have been quickly reversed by the credit rating warnings for the AAA members of Europe by S&P. This puts increased focus on the EU Summit, as failure to reach an agreement at the end of the week will likely raise the possibility of sovereign rating downgrades in the core of Europe. Overall, we also expect markets to remain disappointed by the lack of a funding solution to the current problems in the eurozone. Risk appetite is set to be tested in the coming days.
EURUSD set to resume the downtrend. Indeed, we expect EURUSD to extend the major downtrend. The agreement between Merkel and Sarkozy focuses on fiscal governance, but does not address the more immediate funding needs of Europe. The threat of rating downgrades at the core of Europe should also increase bond market volatility. There is likely to be increased market pressure on the ECB to deliver at this week’s meeting, also undermining support for EUR. Hence, we maintain our short EURUSD position and lower the stop to protect profits.
GBP fails to gain any safe haven support. We have been of the view that GBP is not a safe haven from the problems in the eurozone, hence we expect GBPUSD to come under pressure as a result of the most recent developments in Europe. Moreover, the data from the UK have continued to deteriorate, with the BRC sales survey for November showing a much bigger decline than expected by the market consensus. This morning’s UK house price data also have the potential to disappoint. We maintain our GBPUSD bearish strategy.
The RBA delivered the 25bp rate cut to 4.25% the market expected. AUD remains under pressure. Equity markets in Asia have failed to respond positively to the RBA rate cut, suggesting that AUD will remain fully exposed to the negative global market sentiment. Hence, we maintain our bearish AUDUSD positions.
Among the commodity currencies, we expect CAD to be the outperformer. The BoC is widely expected to keep rates on hold at 1.00% at today’s meeting, while the Ivey PMI reading for November, also due today, is expected to provide a robust reading – one of the few PMIs still printing above 50. We maintain our strategy of selling USDCAD rebounds and have recommended short EURCAD positions as our Trade Idea of the Week.
JPY appears to be losing negative momentum, suggesting that the USDJPY rebound is coming to an end. Our 79.00 target area for re-establishing short positions was not achieved. Hence, we would now suggest lowering the recommended entry level of short positions.
Medium-term portfolio. We maintain our EURUSD short position. We also have short GBPUSD and GBPNOK positions and hit our limit order to sell SEKJPY at 11.50, targeting 10.50 with a stop at 11.75.
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MORGAN STANLEY
SALES AND TRADING