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USD: A Reversal Formation In Play: What’s Next? – Morgan

The US dollar made a  significant comeback, but doubts certainly remain intact. What’s next? Here is the view from Morgan Stanley:

Here is their view, courtesy of eFXnews:

We believe that a USD-bullish technical reversal formation is in play.

However, there should be a split USD performance, rising against EM and commodity FX and falling against EUR, JPY and CHF. The FX outlook is supported further if risk appetite turns around and increases repatriation pressures in Japan.

The case for a bullish EUR and CHF outcome is more muted and mostly related to the reluctance of local fund managers to export their capital. The deflationary FX bloc gains from rising real yields, weak risk appetite and falling liquidity. The cycle could break if the BoJ or ECB were to take radical measures such as monetizing debt or providing ‘helicopter money’.

Without the BoJ or ECB, the Fed would be left to provide relief by allowing USD to rally, supported by increasing US rate expectations.All these cases suggest a higher USD against EM and the commodity bloc.

USD TWI and world stocks May 2016

We expect USD to have some upside correction in the next few weeks  as currency appreciation in low-yielding countries drive the global risk-off sentiment. Markets have begun realising the costs of a weak USD, prompting equity and commodity markets to react negatively to USD weakness.

Technically, the USD has developed a key reversal formation, further supporting our near-term bullish USD view. We like buying USD against EM and commodity currencies such as AUD and CAD.

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Yohay Elam

Yohay Elam

Yohay Elam: Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I've accumulated. After taking a short course about forex. Like many forex traders, I've earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I've worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.