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Institutional Insights: Morgan Stanley FX Pulse

FX Pulse Bullish USD Drivers Have Stayed - Cyclical FX stays offered. The Fed has signaled an asymmetric reaction function to inflation, in turn pushing breakevens higher and real rates lower, but it failed to inspire the equity market. Tighter monetary conditions imposed by widening LIBOR-OIS spreads and growing concern over protectionism have kept risk assets on the back foot, convincing us to maintain our bearish stance on cyclical currencies. NZD should underperform CAD. Trade risks. Global synchronised growth driving the long-overdue capex rebound, pushing USD-denominated funding higher, had been the crux of our USD bearishness. However, trade restrictions may lead to markets anticipating growth divergence, with current account surplus areas most exposed to slower trade resulting from potential protectionism. Ongoing geopolitical uncertainties further suggest markets will reassess exposures to trade risks...
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