Morgan Stanley sidelined on long USD positions despite bullish outlook for 2024

Morgan Stanley outlines its strategic perspective on the USD for 2024, balancing its bullish long-term outlook with current recommendations against taking long USD positions.

Key Insights:

1. Strategic Outlook for USD in 2024:

   • Morgan Stanley forecasts a rise in the USD against G10 currencies by the end of 2024, driven by projections of stronger US growth compared to other major economies. Additionally, subdued investor sentiment regarding China’s outlook could also support the USD.

2. Current Stance on Long USD Positions:

   • Despite the bullish strategic view, Morgan Stanley does not recommend taking long USD positions at present. This caution is influenced by expectations of declining 5-year Treasury yields and the potential for further gains in equity indices.

3. Impact of the Last Fed Hike and First Fed Cut:

   • The period between the last Federal Reserve rate hike and the first rate cut is expected to see increased equity index gains, impacting the current stance on USD positions.

4. FX Valuation Model and G10 Currencies:

   • A high-frequency fair value FX valuation model indicates that several G10 currencies are currently undervalued relative to the USD, suggesting potential shifts in the currency market.

5. FX Volatility Trends:

   • Historical patterns show that FX volatility tends to increase ahead of the Federal Reserve’s first insurance rate cut and then decline as the rate-cutting cycle continues.

Conclusion:

While Morgan Stanley holds a strategically bullish outlook on the USD for 2024, its current position advises against taking long USD positions. This stance is based on expectations of declining Treasury yields, potential equity gains, and the current undervaluation of G10 currencies relative to the USD. The anticipated changes in FX volatility around the Federal Reserve’s rate-cutting cycle also play a role in shaping this cautious approach.

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