Key quotes from the Morgan Stanley FX report:
Shifting from reflation towards deflation trades. The global reflation trade which started on February 11 has run its course, with global equity markets now in retreat.
Asia’s markets have been declining for 7 days in a row, the longest losing streak for a year. Risk sensitive currencies have come under selling pressure, with KRW losing 0.8% overnight.
Elsewhere, the TRY slumped to a 2m low vs the USD after media reports that the prime minister may step aside, delivering a fresh reversal to a strong 2016 emerging-markets rally. We remain short TRY in our Pulse portfolio.
Selling the EM / commodity currency block vs EUR, CHF or JPY remains lucrative.
Oil has remained relatively steady, supported by the US reporting its output falling by 113k barrels to 8.83mln/day last week, reaching its lowest output level since September 2014.
However, oil inventories have kept rising, reaching record levels, suggesting that despite weaker US production, the supply/demand imbalance has remained in place.
We suggest being short CAD within the G10 space.
Iron ore prices are sharply lower. This morning iron ore futures on the Dalian exchange declined by 4.7%, falling the third day in a row, showing the lowest daily close since August 15th.
Copper declined by the third day too, but was only down by a moderate 0.4%.
Where yield curves are most ‘exhausted’ i.e. trading in negative yield territory, are where we would expect real yields to break higher, pushing those currencies higher too. JPY, CHF and EUR fall into this category.
For now markets are busy reducing bearish USD positions, providing USD/JPY with some upside. However, on the crosses the JPY should remain strong.
Today, Abe will speak in London. Anything less than discussing helicopter money or debt monetization will keep the medium-term JPY uptrend in place.
CAD/JPY shorts offer medium-term potential, supported in particular when risk appetite and commodities decline, which we expect over the coming weeks.
Yesterday saw Canada reporting a record trade deficit of CAD 3.41bln, exceeding the July 2012 deficit, due to a 4.8% fall in exports. USD/CAD positioning is bearish.
A stronger than expected US NFP (market expects 200K after 215k) has the potential to push USD/CAD sharply higher.