Morgan Stanley Below Consensus on Pound / Dollar Forecast for 2016
- Written by: Gary Howes
The US dollar and Japanese Yen are predicted to be the stars of 2016 according to analysts at Morgan Stanley.
The US investment bank meanwhile says they see the British pound struggling.
The pound sterling has rallied back above 1.51 thanks to a stronger euro seen towards the end of the previous week.
The rally in the euro complex simultaneously invited broad-based selling of the dollar allowing GBPUSD to head higher.
Despite near-term upside potential, the longer-term outlook remains constrained for sterling-dollar suggest Morgan Stanley who have reaffirmed their bullish sentiment on the USD for 2016.
The investment bank say they see further upside for the world's currency against many G10 and all emerging market currencies over the course of the coming year.
Heading into the week the GBP to USD conversion is seen at 1.5101 on the inter-bank markets while your high street bank should be offering transfers in the region of 1.47. RationalFX, an independent specialist, are seen offering payments around 1.49, a sizeable advantage for those making large transfers.
In the near-term further pound sterling upside could be capped by Industrial Production data due for release this week.
However, Barclays note that last week’s fixed income sell-off saw a modest re-pricing of the Fed-BoE “gap”, adding some upside to GBPUSD.
“Although we continue to look for trend depreciation in GBPUSD, we think the USD may struggle to appreciate too much against major DM peers into year-end following last week’s ECB,” say Barclays.
Pound / Dollar Forecasts Downgraded
In their 2016 forecast note, released early December, Morgan Stanley say downside risks to sterling are increasing and 2016 is set to be a challenging year for the UK currency.
“As a result, we have lowered our GBP/USD projections and now look for a decline to 1.40 by end-2016,” say Morgan Stanley. In fact the bank is well below consensus on sterling-dollar:
For the coming year our UK economists expect UK growth to slow further. GDP is likely to decelerate to 2.0%Y in 2016 compared to an estimated 2.4%Y for 2015.
“Growth is likely to be squeezed by further fiscal tightening. Austerity measures could take half a percentage point off growth in 2016, we believe,” say Morgan Stanley.
Brexit to Weigh
Then there is the issue of Brexit - Morgan Stanley have joined fellow institutions to predict a good chunk of sterling weakness will come Brexit-related issues.
The UK is currently attempting to renegotiate its position within the EU to put to a referendum.
The opinion polls are neck-and-neck. GBP is historically very sensitive to political risk as seen ahead of the 2015 general election and the 2014 Scottish referendum.
“Uncertainty could deter investment inflows to the UK. Longer-term FDI flows have traditionally slowed ahead of such political events, leaving GBP vulnerable,” say Morgan Stanley.
Forecasting Bullish USD Trend in 2016
Longer-term, the current super-cycle in the USD uptrend remains valid argue Morgan Stanley who have compared this multi-year USD rally to two prior
‘super-cycles’, one in the early 1980s and the other in the late 1990s.
In previous cycles the trade-weighted dollar rallied by an average of 45% and the cycle lasted a little less than six years in duration.
“If history is set to repeat itself, this USD rally has another 10% of upside and another year or two in duration, which is consistent with our 2016/17 FX forecasts,” say Morgan Stanley.
As we can see Morgan Stanley sit at the more aggressive end of the US dollar scale.
The implications for longer-term GBPUSD forecasts are notable with the exchange rate tipped to fall to 1.45 by March 2016, 1.41 by June, 1.40 by September and 1.40 by the end of 2016.
Elsewhere the rate of advance by USD agains the EUR is seen as being modest with much of the necessary declines by euro made earlier in the cycle.
The only currency forecast to advance against the USD is the Japanese Yen:
“In fact, we regard the JPY as the strongest performer within G10 for 2016.
“After three years of JPY weakness (see our 2013 outlook) it has reached undervalued levels.”
Morgan Stanley do note that valuation is important for long-term currency projections, but it does not necessarily provide information concerning the timing of the JPY turn-around.
Timing requires information about relative rate expectations and the evolution of future portfolio and FDI related flows.
Latest Pound / US Dollar Exchange Rates
  | Live: 1.3351▲ + 0.18%12 Month Best:1.3789 |
*Your Bank's Retail Rate
| 1.2897 - 1.295 |
**Independent Specialist | 1.3164 - 1.3217 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
US Economic Performance not Necessary Pre-Requisite to Stronger Dollar
Analysts say they do no expect the US economy to be particularly strong in 2016.
They think real GDP will remain in this modest 2%Y zone, reflecting supply-side constraints due to prior lack of investment.
“But underlying resilience is there, especially given still ongoing macro challenges around the world,” say Morgan Stanley.
The Fed is likely to tighten slowly in order to limit too much USD strength, but the greenback’s direction is still set to move upwards for now, Morgan Stanley think.
We do note that other analysts believe the slow path of interest rate rises could be the undoing of the dollar in the year-ahead as markets will demand a steep rises to interest rates.
We got a hint of just how responsive the USD is to future expectations this week when the dollar fell in the wake of what was, on paper, a strong jobs report.
"With a majority share of the market pricing in a 0.25% hike, now the pertinent question is not whether or not the Fed will hike, but rather by how much," says Alex Lydall at Foenix Partners.
If Yellen is to hike cautiously Lydall says a strong dollar might not transpire in the short term. "Following this, movement of the dollar into 2016 will largely be depicted by the pace and path of interest rate hikes," says the analyst.
