US dollar weakness coming
Morgan Stanley says the tide is turning on the US dollar in a note today. Tailwinds to USD strength have been a rising equity market and cheap US corporate funding costs. It was also benefitting from inflows from emerging markets. They note that all those factors have reversed since September.
"Global investors seem to be diversifying away from long-term USD assets while US capital goods orders and shipments have started to moderate. Lower investment suggests that the US may not be able to lastingly increase its growth potential supported by higher productivity. Accordingly, higher US real rates and yields should self-correct via the subsequently slowing US economy building up domestic savings. This scenario would bring about a weaker USD," they write in a note today.
The comment on emerging markets is particularly interesting. Aside from a couple LatAm trouble spots, EM FX has largely held up against the US dollar since the start of October. That's partly a reflection of a more-dovish Fed but it may also highlight that EM growth could be more attractive than what's coming to the USA.
Since Oct 1:
