⌛ Did you miss ProPicks’ 13% gains in May? Subscribe now & catch June’s top AI-picked stocks early.Unlock Stocks

Morgan Stanley: Greenback to crush Australian dollar

Published 31/05/2023, 09:11 am
EUR/USD
-
AUD/USD
-
MS
-
DXY
-

Morgan Stanley (NYSE:MS) with an argument that I agree with. Add China going ex-growth and US AI leadership and this argument carries weight well into the next cycle. 

We continue to recommend long USD positions against EUR and AUD. Our bullish USD view reflects our belief that markets appear to have priced optimistic outcomes in the US (inflation declines,Fed cuts) and abroad (growth remains supported), and that USD will gain as tail risks become increasingly priced.

Inflation swaps imply US inflation falls quickly (Exhibit 8). As inflation is expected to fall swiftly, market pricing implies the Fed will cut rates more and more quickly than other G10 central banks (Exhibit 9).

Swaps

These market-implied paths for inflation and policy rates strike us as assigning too low a probability to tail risks. In our view, markets should assign a higher probability to the tail risk that US inflation remains high and sticky.

As our US rates strategy colleagues note here, 3m, 6m, and 12m core CPI are all close to 5%, which we think suggests recent inflation has been sticky near 5%. We also think markets should assign a higher probability to the tail risk of a sharp global growth slowdown.

Coincident data from the OECD suggest that growth outside the US has slowed to around the low levels seen in Q4 of 2022. Chinese growth data have been surprisingly weak, raising questions about whether further policy support will be needed.

GDP

Meanwhile, the European economic recovery from the COVID-19 pandemic has been lackluster. Demand and production data from Germany indicates that activity remains below pre-COVID levels in real terms (Exhibit 11).

That sluggish economic momentum contrasts with similar metrics in the US. Demand data suggest that price pressures remain well above pre-COVID levels (Exhibit 12).

US demand

Relatively muted demand in the euro area raises risks that services inflation decelerates in Europe as it has in the US (Exhibit 13). A higher market-implied probability of these risks (stickier-than-expected inflation in the US, a sharp global growth slowdown, or a deceleration in euro area services inflation) would likely support the USD.

Latest comments

Loading next article…
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.