Morgan Stanley is out with a note reiterating its structural bullish USD views reflecting that in a very interesting title for this note, ‘In USD We Trust’.
US Economy – From Strength to (More) Strength:
“Better-than-expected US data this week following last week’s strong prints reinforce our view of the economy developing escape velocity. Barring the safe-haven flows supporting US fixed income currently, money market normalization in the US has begun, in our view. FOMC voting member Fisher’s comments point to an increasing debate within the Fed about bringing forward the first rate hike – we expect US front-end yields to normalize,” MS projects.
The Missing Piece:
“US data have been strong across the board and now the missing piece for more hawkish Fed policy is higher wages. Wages have stayed at a muted 2% YoY level, which is too low for the Fed given its 2% inflation target. Markets will stay tuned, with inflation indicators staying particularly in focus,” MS argues.
The ECB has left is monetary policy assessment unchanged. Despite the ECB citing a small improvement in lending activity EURUSD ended lower at the end of the conference. Draghi suggested that interest rates are going to stay unchanged for an extended period of time, which is going to put the EUR under lasting selling pressure, in our view,” MS adds.
In line with this view, MS maintains a short EUR/USD position in its strategic portfolio from 1.3620 with a profit-stop at 1.35, and a target at 1.31. As a short-term recommendation, MS enters a fresh short today from 1.34, with a stop at 1.3460, and a target at 1.31.