Morgan Stanley thoughts via eFX

USD: Back to 'Good' USD Strength. Neutral.

We think the USD has scaled back to levels where it could resume its rally. The risk outlook remains positive as US financial conditions have eased and global trade data has improved, implying that the 'good' USD strength may be back in play. Yellen's speeches this week will be in focus. We look for commentary on whether she will stick with herview of three hikes this year. With the markets only pricing a 25% chance of a March Fed hike, there is potential for her to surprise hawkishly, supporting USD strength.

EUR: Reacting to Peripheral Spreads. Bearish.*

Eurozone political risks have come into focus, causing peripheral spreads to widen, with investors starting to sell the EUR, which was previously not reacting to the rates market. With wide peripheral spreads and inflation divergence within the euro area, the ECB is unlikely to remove monetary accommodation anytime soon, which will push yield differentials against EUR. We expect further downside for EURUSD and EURJPY. A break of the 50DMA around 1.06 for EURUSD will provide significant downside momentum for the pair.

JPY: 112 Still Supported. Bearish.*

The JPY has strengthened recently in line with Eurozone-related risk worries. Japanese investors own a lot of EURdenominated bonds (especially France) suggesting that any increased volatility could cause a setback in our JPY view, by putting downward pressure on EURJPY. USDJPY has however failed to break materially below 112, keeping us in the long trade for now. The BoJ has made theiryield curve control strategy extremely clear, which should help the JPY weaken.

GBP: Carney Keeps Real Rates Low. Bearish.

GBPUSD should see a bit more downside as the market more fully understands the BoE's dovish stance. Carney justified the low bank rate by saying there was still slack in the economy. We find that GBPUSD doesn't fully reflect the recent fall in UK real rates, which could fall further if UK CPI is strong this week. A sustained break below the 1.2430 area should allow the final leg down to below 1.2000.

CHF: Peripheral Spreads Drive CHF. Neutral.

We continue to expect the SNB to limit the downside for EURCHF in the short term. In times of market uncertainty in the Eurozone and peripheral spread widening, we would look to sell EURCHF as a political hedge. We are not looking to buy USDCHF, even if it has moved to more desirable levels.

AUD: Staying Short. Bearish.*

While the RBA sounded more optimistic on growth and less worried about the AUD, which is justified by the surge in its terms of trade, we remain cautious on the currency. Australia's economic data has disappointed while the rest of G10 has seen data improve, as evidenced by the latest CPI reading. China's data also has not improved and the authorities are tightening monetary conditions, which could weigh on growth and spillover into Australian economic data.

NZD: Risks from Positioning. Neutral.

Despite the RBNZ removing their easing bias and sending a balanced message in the latest meeting, NZD has weakened as market expectations were too high going into the meeting, with 23bp of rate hikes priced in and investors being long NZD. AUDNZD has broken through the 100DMA and 200DMA decisively, giving scope for a bit more NZD weakness as positioning continues to adjust. However, the downside would likely be limited as New Zealand's economic data and inflation are on an improving trend.