The dollar is not the top choice as a safe haven currency nor a total sell off. What would be the right pair to trade it against?
The team at Morgan Stanley has some answers:
Here is their view, courtesy of eFXnews:
In a recent note to clients, Morgan Stanley argues that the USD bull market is not yet complete, with EM/commodity currencies likely to come under additional selling pressure.
“The focus is on AXJ, where the combination of debt, overcapacity and loosening USD linkages should lead to more FX weakness. That said, most European currencies and JPY offer temporary value, in our view, as financial cross-border flows ease,†MS adds.
Here is how MS sees the outlook of the USD over the coming months along with its forecasts for EUR/USD, USD/JPY, and USD/CAD:
Trust the USD bull. “Despite recent market volatility and USD’s divergent performance, the US remains an attractive risk-adjusted investment destination over the medium term, in our view. After funneling billions into EM and commodity-heavy markets for years, US investors are repatriating at a fast pace,†MS notes.
But choose the right USD pair near term. “We foresee further disinvestment from vulnerable EM. However, EUR and JPY could surprise in their comparative strength, as cross-border flows ease. In 2016, EUR should resume its downtrend as the world’s favorite funding currency,†MS projects.
Commodity FX not done yet. “Even if commodity prices stabilize, AUD, NZD and CAD still face further downside. Second- and third-round effects of lower terms of trade will slow domestic growth and lead to further easing,†MS adds.
MS end-end forecasts put EUR/USD at 1.13, USD/JPY at 121, and USD/CAD at 138.Â
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