Institutional Insights: Morgan Stanley FX Pulse

Preparing for a Corrective USD Rebound - Signs not to be ignored. The USD has increased its procyclical behavior recently, weakening in line with the slowdown in US data. Hard and soft data have decelerated, with the Atlanta Fed's GDP tracker down from 5.4% to 1.9% for 1Q. The DXY may still see new index lows over time, but the odds of USD entering into a corrective, tradable rebound have increased. In the unlikely scenario of growth slowing down for good, equity markets may weaken. Related portfolio rebalancing needs could then spill over into cyclical and EM currencies, pushing USD higher. With hindsight, our decision to turn from bullish to neutral on EM on Monday appears timely and risks are tilted toward weakness here...
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