Morgan Stanley abandons call for weaker US dollar

Bloomberg

Morgan Stanley strategists have dropped their expectations of near-term weakening in the dollar amid a regime shift in US rates propelled partly by prospects for meaningful fiscal expansion.
“It’s no longer attractive to be positioned for a weaker dollar from here given the uncertainties around the fiscal policy outlook, the monetary policy outlook, and the growth and inflation outlook,” Matthew Hornbach, global head of macro strategy, said in a phone call.
The Bloomberg Dollar Spot Index headed for its best three-day rally since September on Monday as traders covered short positions while 10-year Treasury yields pushed higher to levels not seen since March. The dollar had fallen as much as 14% from last year’s peak in the first quarter as the raging coronavirus wreaked havoc on much of the US economy, with many forecasters turning more bearish on the US currency towards the end of last year.
Morgan Stanley, which Hornbach describes as an “out-of-consensus dollar bear” for much of the past nine months, has now exited short positions on the dollar versus the euro and Canadian dollar. Instead, the firm recommends shorting the British pound versus the Norwegian krone, and suggests pivoting towards being short the Swiss franc versus the loonie.
“We turn neutral on the USD amid rising US fiscal stimulus odds and crowded USD sentiment,” Hornbach, colleague James Lord and others wrote in a note. Meanwhile, they said they’re looking “for signals on when to turn bullish.”
Two key factors are behind the revised call on the dollar. Democrats’ victory in the Georgia runoffs last week suggests as much as $1 trillion in additional Covid-19 relief may be coming as soon as this quarter, the strategists said. There’s also the possibility of discussions by the Federal Reserve about normalising policy, which could begin as early as June.
“These two forces have the power to dispel a widespread USD-negative assumption of low US yields,” the firm said. “With focus shifting to new fiscal policies in the US, we think both US real yields and the US dollar are in a bottoming process.”
In addition to Morgan Stanley, Wells Fargo Securities strategists wrote that “USD weakness is starting to look stretched, and we think a short-term reversal is imminent.”