The US dollar has been a strong performer this year and it’s tough to bet against it going forward given the setup for US economic outperformance. That said, it’s clearly a crowded trade and Morgan Stanley’s David Adams thinks it’s too crowded.
“Based on our conversations, it seems that consensus has firmly shifted towards a higher DXY for the foreseeable future,” Morgan Stanley analysts wrote.
They argue that much of the good news is already in the dollar and that market participants could be “overestimating the speed, breadth and magnitude”of Trump actions on trade.
While trade policy announcements could come relatively quickly, their
implementation is likely to be slower and their scope narrower than many
investors seem to expect, with trade restrictions largely focused on
China,” MS said. “We sense investor sentiment on the whole is very constructive on the
greenback, suggesting asymmetric risks for a ‘pain trade.'”
They see the pound and Australian dollar as beneficiaries, rising to 1.3200 (from 1.2750) and 0.6750 (from 0.6380), respectively.