The US dollar suffered another setback this week with the blow it received from the retail sales report. Can this blow be more significant?
The team at Morgan Stanley examine tactical USD shorts:
Here is their view, courtesy of eFXnews:
In its weekly FX note to clients, Morgan Stanley updates its thoughts on the current USD correction, and how should investors position in case there is some further room for tactical USD downside. The following are some of the key points in MS’ note along with MS’ technical set-up for trading EUR/USD.
Cautious on USD:
“The 25% USD move from the middle of last year to March had less to do with the US than it did with the rest of the world, in our view. Deflationary pressures, falling commodity prices and aggressive monetary easing outside of the US meant that USD could appreciate even with US bond yields staying low,†MS notes.
“Things are different now. Deflationary risks have subsided in much of DM, aided by a rebound in commodity prices. Central banks are occasionally surprising markets by doing less, rather than more, easing. In this environment, the long USD trade requires clear signs of durable US growth. In their absence, the path of least resistance is a further correction lower in USD,†MS argues.
“Given a data-dependent Fed, it is unlikely that front-end rates can rise much in USD’s favor. It will take until next Friday’s core CPI and then perhaps the next US employment report on June 5 to convince markets and the FOMC that the US economy can stand on its own feet,†MS projects.
Don’t Favor USD Shorts:Â
“Ultimately, we are still of the view that the US remains “the best house in a bad neighborhood.†Indeed, without US consumption picking up, it is difficult to see how export-led economies will thrive in the medium term. As such, we are not adding short USD positions at this time even if there is some further room for tactical USD downside against certain currencies,†MS advises.
EUR/USD Technical Setup:
“The wave structure suggests that there could be some upside momentum in EURUSD since the 5 th wave is incomplete. We suggest selling on rebounds just above the 1.15 area. There will be further downside momentum on a move below 1.1200, the lower end of the current channel,†MS adds.
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