Morgan Stanley, a leading global financial services firm, has recently expressed its outlook on the US dollar (USD) and Japanese yen (JPY) in its latest report.
Morgan Stanley analysts believe that the US dollar has the potential to continue to gradually strengthen this year. They point out that even if the global economy manages to circumvent a full-scale recession, the asymmetry in central banks' reactions coupled with uninspiring economic growth rates indicates that investors are likely to maintain a defensive stance in the markets. Furthermore, the positive carry that the USD offers makes it an attractive option for investors.
The report also includes an exhibit, which demonstrates that the US dollar is expected to offer approximately a 2% annual carry in the G10 through at least 2024.
Additionally, Morgan Stanley expects the Japanese Yen to lead gains in the G10, possibly even surpassing the US Dollar. This is anticipated to be driven by narrowing rate differentials as further adjustments to the Bank of Japan’s yield curve control program coincide with long-end US yields moving closer to local rates.
However, the analysts also note that holding a short position in USD/JPY could be challenging due to the cost of carry eroding the projected spot return in its entirety.
This outlook suggests that investors should closely monitor the movements of USD and JPY, considering the global economic environment and central bank policies in both the United States and Japan.
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