Morgan Stanley goes all out on top ten FX trades for 2017. The year of emerging market currencies?

In just a few days time, the last month of 2016 will commence, and what has been a year of careful conservatism, with brokers and traders alike sticking rigidly to the major currency pairs, whilst the banks changed the trajectory of available liquidity by cracking down on the extension of credit to OTC derivatives firms, will come to an end.

2016 has been the year of the prime brokerage, largely due to the necessity that arose for OTC FX firms to be able to find sophisticated methods of sourcing live market liquidity as well as being able to process their trades through to the live market in an environment in which Tier 1 banks have become reluctant, and in which volatility has been quite high due to the milestone geopolitical events that have taken place in Britain, Europe and North America this year, all homes to sovereign major currencies.

As 2017 draws near, analysts at major interbank FX dealers are beginning to take a look at what traders will focus on next year, and Morgan Stanley has now issued a list of its top ten trades for the new calendar year, some of which are quite surprising, and and represent a massive diversion from this year’s ultra-careful trading environment.

So here they are, Morgan Stanley’s hot trades for 2017

1) Long USD/JPY
Yield differentials driving outflows from Japan and higher inflation expectations.

2) Long USD/KRW
Diverging growth and monetary policy to increase outflows from Korea.

3) Short EUR/GBP
No new negative UK news allows the undervalued GBP to recover.

4) Long USD/NOK
Norway government’s slower fiscal support to make long NOK positions adjust.

5) Short AUD/CAD
Reflects the diverging US-China economic growth stories.

6) Short SGD/INR
Relative external sector dependence, China exposure and debt overhangs.

7) Long USD/CNH
RMB weakens from capital outflows and diverging monetary policy from the US.

8) Long BRL/COP
We expect reform momentum and high yields to cushion external risks

9) Long RUB/ZAR
Continued tight monetary policy should help RUB outperform

10) Long CHF/JPY
Yield differentials weaken JPY, while CHF is a good eurozone political risk hedge.

Morgan Stanley’s research division issued a notice yesterday stating “JPY is our top currency to sell as the Bank of Japan’s yield curve control strategy should allow yield differentials to widen versus the US. We expect USD/JPY to head to 130 in the second quater of 2018, at the same time the broad USD index is expected to gain 6%, topping out in the second quarter of 2018.”

What is particularly interesting here is that there are a significant number of emerging market currencies in Morgan Stanley’s sights for next year, some of which are set to be traded against majors, some against other emerging market currencies.

One FX industry executive who thinks along these lines is Jon Vollemaere, a FinTech entrepreneur who founded R5FX just over two years ago to focus on the trading of emerging market currencies – largely from the BRICS nations – on an OTC basis.

Remarkably, Morgan Stanley’s predictions show the exact currencies that Mr. Vollemaere considers to be the up and coming instruments as being the ones to trade next year.

In April this year, R5FX received full authorization from the Monetary Authority of Singapore (MAS), Singapore’s official financial markets regulator, to begin live trading in the third most prominent destination for interbank FX in the world.

R5FX’s entry into Singapore began quite some time ago, and the firm has taken considerable time in enlisting some prominent talent to its board in the quest for entering the Asia Pacific region.

Back in September 2015, despite its emphasis on the five BRICS economies, the company began to display that blue blood was for certain an integral part of the board at R5FX, with Lord Flight having been elected, demonstrating that at government level, confidence in investing in firms that support the path toward trading emerging market currencies is of interest.

Lord Flight is a Conservative politician in Britain, as well as a member of the House of Lords and is a director of several financial organizations with a bent toward the emerging markets. He is also on the board of directors of several well known companies including Investec asset Management as well as being Chairman of CIM Investment Management.

Emphasizing the company’s drive toward making a significant entry into Singapore, Eng Huat Tan joined the board alongside Lord Flight, bringing with him thirty five years of experience across large institutions, most recently having held the position of Head of Global Treasury at OCBC in Singapore, preceded by senior executive positions at Dresdner Bank, Swiss Bank Corporation and Overseas Union Bank, all in Singapore.

In January this year, Ben Li-Wong, a former Integral Development Corporation executive based in Singapore joined R5FX as Sales Executive.

The authorization from MAS and the company’s foray into Singapore’s sophisticated and established electronic currency trading market makes for a very stable location from which R5FX can approach some of its target emerging markets, which are located in the Asia Pacific region, and it may be that during the coming year, companies such as this are set to flourish, with bank analysts at major FX dealers sharing their enthusiasm.