Morgan Stanley’s forecast for dollar exchange rate in 2019 and investment recommendations.

Morgan Stanley expects that 2019 would be a tough year for the U.S. dollar and here is why.

Current spending on funding the budget deficit (due to the interest rates growth) will make currencies of the foreign capital countries-importers, such as the United States, more vulnerable to the weakness. At the same time, currencies of countries-exporters, such as Eurozone and Japan, should strengthen. Such a review was published by Morgan Stanley analysts led by Hans Redeker in the global forecast of the market for 2019.

After Trumps administration provided fiscal stimulus, lowering taxes and widening the budget deficit surplus, while the Federal Reserve continued hiking the interest rates, which caused the greenback’s rally in 2018 together with deregulation, the situation will change dramatically in 2019. The expenditure related to funding the budget deficit bloated by Trump’s measures will enlarge significantly due to the growing interest rates in the United States. The economy will get several restraining factors in 2019, instead of growth momentum. That will re-balance the growth pace in the scope of the global economy. The U.S. dollar’s weakness will become the price of such changes.

The greenback’s decline and emerging markets assets’ lowering prices will support the recovery of the last ones. The growth of capital demand in Northern Asia and Europe should cut excess savings in those regions, weakening the global liquidity conditions and lift the assets’ volatility.

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Here are the bank’s main recommendations for the next year:

1. Sell the U.S. dollar versus a basket of Euro (EUR) and Swedish Krone (SEK) in the light of Eurozone inflation growth forecasts and integration perspective. Riksbank interest rates hikes should increase the Krone’s attractiveness significantly, while the U.S. economic growth will slow down.

2. Sell dollar-yen (USD/JPY) in the scope of repatriation flows predictions of the Japanese capital and the U.S. slowdown.

3. Sell Australian dollar versus Japanese yen (AUD/JPY) due to the weak forecasts of household spendings in Japan, the more tight liquidity conditions and Japanese capital’s repatriation.

4. Sell AUD, New Zealand dollar (NZD), Canadian dollar (CAD) versus a basket of Swedish and Norge Krone (SEK and NOK) as strong European forecasts are in contrast to weaker balances…

5. Short Franc-Yen cross rate (CHF/JPY) due to the different approach in repatriation support and European integration.

6. Long position for Brasile Real / Mexican Peso (BRL/MXN) because of policy uncertainty and budget risks probably will have an impact on MXN.

7. Sell U.S. dollar versus a basket of ARS, ZAR, IDR; the choice is done in favour of high-yield emergency market currencies, supported by large output in the carry-trade and lower forecasts for DXY.

8. Short USD/INR.

9. Short CHF/CZK.

10. Long SGD/CNH.

11. Buy Treasury bonds, sell German and British securities for 2019.
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