Morgan Stanley goes long on US dollar

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This was published 9 years ago

Morgan Stanley goes long on US dollar

By James Thomson

The Australian dollar might be ticking back up towards US89¢, but that has not stopped Morgan Stanley suggesting sophisticated investors explore ways to go long on the US dollar.

The Australian dollar hit a three-week high overnight, peaking at US88.82¢ before drifting slightly lower to US88.60¢. This is about half a US cent higher than on Tuesday, when the Australian dollar was at US88.13¢.

Morgan Stanley’s private wealth team is betting that the renewed strength in the Aussie is a short-term trend.

Morgan Stanley’s private wealth team is betting that the renewed strength in the Aussie is a short-term trend.

The US dollar was sold off on a weaker-than-expected reading of US durable goods orders last month. But most currency traders are waiting for Thursday morning's announcement from the US Federal Reserve after its two-day policy meeting, when more clarity about the timing of a US interest rate rise is expected.

But Morgan Stanley's private wealth team is betting that the renewed strength in the Aussie is a short-term trend.

"We have been arguing for a weaker AUD since early 2012 when AUD/USD was still above parity, and finally seem to have entered the start of a period of USD strength and AUD weakness," a new report by Ewa Turek, Malcolm Wood, Sze Chuah and Terry Yuan says.

They say US dollar strength "could persist for several years" for three key reasons: accelerating growth in the US economy, US interest rates rising faster than Australia's and what Morgan Stanley calls "unsynchronised" global monetary policy.

"At the same time the Australian dollar is likely to face downward pressure from lower commodity prices and a sluggish domestic economy which will result in lower-for-longer rates and potentially additional cuts."

Morgan Stanley's current estimate for fair value for the Australian dollar is US82.6¢, and its economists see the AUD down at US84¢ by the end of this year and US76¢ by the end of next year.

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"Based on current spot prices, the projected 12-month return on a long USD/AUD position is ~14 per cent," the report says.

The report, from Morgan Stanley's private wealth team, examines the US dollar play through the prism of Morgan Stanley's model portfolio for sophisticated investors.

Part of this portfolio is allocated to alternative investments, which Morgan Stanley defines as "non-traditional assets that often derive their returns from market inefficiencies, have low or negative correlations with traditional asset classes such as equities, and tend to be less liquid than their traditional asset counterparts".

The demise of the van Eky Blueprint funds last month saw the removal of an exposure to those funds removed from the model portfolio, and the need for re-allocation.

The report says the best way to gain the required exposure to the US dollar is via the BetaShares US Dollar ETF.

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