What to do after the huge US dollar moves
The USD lost value since yesterday after weak US services PMI and comments from the Fed's Dudley suggesting that the tightened financial conditions seen in the US may require the Fed to adjust its thinking in respect of when or if to hike rates further, notes Morgan Stanley.
"High correlations made oil and other commodity prices develop their biggest one-day gains in history, narrowed US corporate bond spreads, pushed equity prices higher and finally allowed China to fix the RMB higher against the USD," Morgan Stanley said.
When the USD goes down, other currencies go up. "The inflation expectation impact on lowflation economies from the FX moves may be less painful if overcompensated by rising commodity prices such as oil. Accordingly, we expect further gains for the EUR and the JPY," MS argues.
"EURUSD setbacks to 1.1060/20 offer a buying opportunity targeting 1.1360. A similar picture emerges for USDJPY where levels near 118.50 offer an opportunity to go short, targeting 115.00," MS advises.
"Comments by a Kuroda adviser suggesting the BoJ could lower its deposit rate to -1% will not prevent USDJPY trading lower, currently primarily driven by falling interest rate differentials. Moreover, Kuroda suggested that he does not foresee negative rates on bank deposits and the Nikkei Asian Review has a report saying that the BoJ will limit the scope of the new negative interest rate policy (takes effect February 16) to between JPY10trn and JPY30trn," Morgan Stanley adds.
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