The weekly currency review from Morgan Stanley
Morgan's have been USD bulls since before time began. If there's an angle to remain bullish, they're on it like a flash. So as we head into what might actually be a Fed cycle of multiple hikes, they actually counter the argument for seeing the dollar soar.
"Why today's USD setup is different.
In 2014, the anticipation of US monetary tightening
led to USD strength particularly vs the EUR and JPY. This was a time when both the ECB
and BoJ were actively guiding the markets into even easier policy paths but also the
global economy was in much worse shape. USD strength was the result of a world that
was thought of as being stuck in a low-growth rut and/or facing disinflationary
pressures. Now, as we progress through a year that is likely to have multiple US rate
hikes, past form would have suggested substantial USD strength. Instead, those
economies where macro is improving amid a rebound in global trade growth and/or
terms of trade gains are continuing to see exchange rate appreciation against the USD."
In my opinion it's a very valid point and one of the reasons for my long-term EURUSD long trades. It makes absolute sense not to rely on past performances to assume the same may happen again. No two trades are ever the same and the same applies to fundamental situations.
There's been no changes or new trades to their portfolio so here's their current assessment on what's running. They might be kicking themselves for bailing on their USDJPY long right now though ;-)
- EURGBP short at 0.8480 TP 0.8000 SL 0.8800
"We continue to like selling EURGBP, particularly if the USD's trajectory is more uncertain. In an environment of carry support and market calm, we think the focus has moved away from worries about Brexit effects. There may be many Article 50 related news headlines in the coming weeks but we believe that a lot of the negativity around Brexit-related economic data
weakness is already in the price. GBP is currently undervalued relative to a PPP based model. An expectation that GBP may no longer depreciate may also allow foreigners to come back into UK assets, which are cheaper after the FX moves from last year. In contrast, eurozone political risks remain high as we get closer to elections. The ECB is unlikely to change its accommodative stance as inflation rates remain wide across the eurozone. In the middle of 2016, 63% of global
reserve allocations were in USD, 20% in EUR and only 4% in GBP. As commodity prices stay supported and the USD is no longer strengthening at its former pace, there will be room for total FX reserves to rise. Eurozone political risk events and related EUR bond volatility may provide incentive for these reserve managers to reallocate away from the EUR. GBP seems a good alternative as the Brexit uncertainties are baked into the price and GBP is an undervalued G10 currency, in our view. The risk to this trade is an undershoot of UK wage data and resulting weakness in consumption."
- EURUSD short at 1.0650 TP 0.9900 SL 1.0850
"Heightened Eurozone political risks and a dovish ECB will keep the EUR under selling pressure. The markets will of course continue to keep a keen eye on polls in relation to the French presidential election and the developments in the Netherlands, but we think they should also consider the economic environment. Since inflation rates remain widely different across eurozone members, the ECB may need to set monetary policy for the weakest link, causing the loose policy to limit the upside for the EUR. In addition, widening EMU peripheral spreads are starting to negatively affect the valuation and volatility of EUR denominated assets. Liquidation potential from the Japanese real money community will put the EUR under selling pressure. The
USD side of the pair is of less relevance in times of market political uncertainty. The risk
to the trade would be a reduction in market worries about Eurozone break-up risks."
- AUDUSD short at 0.7540 TP 0.6900 SL 0.7800
"The USD leg of this pair is now helping our position and we continue to hold as a China related hedge. The Australian economy is still recovering from its terms of trade shock which
some may believe a weak AUD could help. Sydney house prices continue to soar, so our economists are watching for a slowdown here as an indication for the RBA to consider cutting rates in the future. The risk to our trade is that iron ore prices, which have stabilised in the last two weeks, continue to rise. Seasonal restocking at Chinese steel mills is expected to continue for a short period of time, after which historically, steel stockpiles have retreated. The risk to the trade is Chinese mills continuing to stockpile iron ore, improving Australia's terms of trade."
