Morgan Stanley says dollar risks are increasingly skewed to the downside as FX markets grow less sensitive to energy war headlines, though refined product shortages remain a key upside risk for the currency.
Morgan Stanley says dollar risks are increasingly skewed to the downside as FX markets grow less sensitive to energy war headlines, though refined product shortages remain a key upside risk for the currency. Summary Morgan Stanley analysts say risks for the dollar are increasingly skewed to the downside, with FX markets becoming less sensitive to energy supply disruption headlines from the war Investors are shifting focus to longer-term themes, with Morgan Stanley saying there is broad agreement that the dollar has scope to trade at a deeper discount to rate differentials The bank is nonetheless cautious about turning outright negative on the dollar, warning that markets may be underestimating the risk of refined energy product shortages Such shortages could weaken economic data expectations and trigger risk aversion, both of which would traditionally support dollar demand Morgan Stanley has flagged a meaningful shift in foreign exchange market dynamics, warning that risks for the dollar are increasingly tilted to the downside as investors grow less reactive to energy supply disruption headlines and turn their attention to longer-term structural themes.
In a note to clients, the bank’s analysts said FX markets are displaying a diminishing sensitivity to news flow around the war’s impact on energy supply, a notable development given the scale of disruption to Strait of Hormuz traffic and Iranian crude exports in recent weeks. Rather than trading on each new headline, investors appear to be stepping back and focusing on where the dollar should be trading relative to interest rate differentials over a longer horizon. Morgan Stanley said it believes investors broadly share its view that there is meaningful scope for the dollar to trade at a deeper discount to those rate differentials, a framing that implies the currency has further to fall from current levels once the noise of day-to-day war headlines recedes.
The bank is not yet ready to turn outright negative on…