Morgan Stanley advises US dollar sales as markets bottom

SINGAPORE: Global financial markets are now in a bottoming phase, and investors should start to add risk and sell the US dollar, according to Morgan Stanley.

The tightening of financial conditions has been fast and furious, caused by a slump in stock markets and a widening of credit spreads, strategists including Matthew Hornbach in New York wrote in a report published Friday. However, support measures, mainly by central banks so far, are helping to deliver easing and stabilise the situation, they said.

“That’s not to say we’re ‘calling the bottom’ or we’ve seen the lowest prices in risk assets,” the strategists wrote.

“But it is to say that we’ve entered the final phase of this severe, acute bear market. And that means we’re closer to the ‘early stage recovery’ phase than we were over the past three weeks. As such, our strategists around the world have begun suggesting the addition of risk.”

The global spread of coronavirus has roiled markets in recent weeks, causing volatility to spike and spurring a flight to haven assets, including the US currency. The Federal Reserve slashed interest rates to near zero late on Sunday and announced massive bond buying, adding to the growing cavalcade of stimulus provided by central banks and governments around the world.

“The time has come to sell the US dollar,” the Morgan Stanley strategists wrote in their report, which was published before the Fed’s latest action.

“We expect further US dollar weakness, driven by the interrelated combination of aggressive Fed stimulus and a tactical risk rebound,” they said.

“The US Dollar Index may reach, if not breach, the 95 level.”

The gauge dropped 0.3% Monday to 98.409 after surging 2.9% last week.

The strategists recommend buying the euro versus the dollar with a target of 1.16 and a “fairly wide stop” at 1.08 given the high market volatility. They also advocate going long the Australian dollar versus the greenback targeting 0.68 with a stop of 0.60.

“Markets have moved a lot in the past couple of weeks, with the recent 20%-plus drawdown in global equities one of the most aggressive on record,” the strategists said.

“Looking across asset classes, the cost-benefit of risk taking is increasingly moving in a positive direction.”