US Dollar Rally Forecast to Advance: Morgan Stanley

 

Australian dollar forecast

The debate over whether the May rally in the US dollar can extend into June rages on. In the ’Yes’ camp are Morgan Stanley, whose analyst Hans W Redeker writes:

We expect the USD advance to continue from here, but may develop within a risk negative environment suggesting the DXY losing momentum relative to the Fed’s broad USD index.

Risk aversion could keep demand for JPY, EUR and the CHF solid, while the EM and commodity bloc is likely to ease further from here.

In the meantime, risk appetite will have to struggle with relatively high real rates, due to low inflation expectations within many DM environments. The notable exception is the USD which has seen a rise of its nominal interest rates recently.

Our near-term risk focus is turning towards oil, which has diverged from its normal inverse correlation with the USD and other commodities such as copper.

Non-commercial oil futures positioning is getting increasingly long, on some measures now even exceeding May 2015 levels, when oil traded above $65.

We remain short the oil sensitive CAD and RUB.

Inflation isn't just about oil.

Despite the 73% increase of oil prices from January lows, inflation expectations have continued to decline, underlining deflationary risks, potentially driven by growth worries.

For example, the RBA's Stevens said that despite falling inflation in Australia, there is no need to amend the bank's inflation target, signifying that some of the low inflation is attributed to weaker growth and adding to our short AUD view.

Overall, it has not helped that oil prices rose due to supply outages rather than improving demand.

A supply driven oil price increase does not work in favour of risk appetite nor does it support long-term inflation expectations.

Demand driven oil price rises would be ideal to support risk and inflation expectations.