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🇺🇸🌐 US HEGEMONY VISUALIZED: $USD is the most widely tokenized currency, and not a single $EUR stablecoin makes it into the top 20 stablecoins by supply. https://t.co/K9L4M1XjDv ...

Accessible version Liquid Cross Border Flows Q3 halfway mark Key takeaways FX flows so far in Q3: consolidation Consolidation perhaps best characterises FX flows so far in Q3, after – sharp in the case of USD – positioning adjustments in 1H: investors have bought USD, CHF, and EM FX vs. JPY, GBP, and CAD (Exhibit 1). Among BofA investors, USD shorts are light (Exhibit 2). Exhibit 1: So far in Q3 investors have bought USD, CHF, and EM FX vs. JPY, GBP, and CAD Changes in aggregate FX positioning -40 -20 0 20 ...

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Summary of Morgan Stanley's G10 FX Strategy Update Industry Overview - The report focuses on the G10 foreign exchange (FX) market, analyzing various currencies against the US dollar (USD) and providing strategic insights for investors. Key Currency Views USD (US Dollar) - **View**: Bearish - **Skew**: Bearish - The DXY is expected to weaken, particularly against EUR, JPY, and GBP. The risk premium has largely driven the post-Liberation Day move, with potential for further increases in risk premium [2][12][17]. EUR (Euro) - **View**: Bullish - **Skew**: Bullish - EUR/USD is under upward pressure due to increased USD-negative and EUR-positive risk premiums, alongside a compression in Fed-ECB rate expectations [3][18]. JPY (Japanese Yen) - **View**: Bullish - **Skew**: Bullish - Optimism regarding a potential Bank of Japan (BoJ) rate hike and concerns about the US labor market may lead to speculation about policy convergence, reducing appetite for JPY carry trades [4][19]. GBP (British Pound) - **View**: Bullish - **Skew**: Bullish - GBP/USD is seen as an attractive option for investors, reflecting a carry-neutral expression of a USD-negative, Europe-positive view. The carry remains crucial for GBP's outperformance [5][21]. CHF (Swiss Franc) - **View**: Neutral - **Skew**: Bearish - Short CHF positions are attractive from a carry perspective, but much of the CHF-negative tariff news is already priced in, potentially leading to underwhelming growth expectations [6][22]. CAD (Canadian Dollar) - **View**: Bullish - **Skew**: Bullish - Anticipation of a decline in USD/CAD, even if upcoming CPI shows signs of deceleration. The convergence of US-Canada rates is expected to weigh on USD/CAD [7][25]. AUD (Australian Dollar) - **View**: Bullish - **Skew**: Bullish - Strong domestic fundamentals and elevated yields could lead AUD/USD to re-test 0.6600, with potential upside towards 0.6900 if CPI surprises positively [8][26]. NZD (New Zealand Dollar) - **View**: Neutral - **Skew**: Neutral - A 25bp cut by the Reserve Bank of New Zealand (RBNZ) is fully priced in, but stronger-than-expected growth raises the risk of an NZD-positive surprise if the OCR forecast does not decline [9][27]. SEK (Swedish Krona) - **View**: Neutral - **Skew**: Neutral - The upcoming Riksbank meeting is not expected to be a major catalyst, but a rate cut in September is seen as underpriced [14][29]. NOK (Norwegian Krone) - **View**: Neutral - **Skew**: Bearish - A bearish tilt on NOK is noted, with expectations of a lower trough rate from Norges Bank, which may not be fully priced in by the market [16][30]. Additional Insights - The report emphasizes the importance of monitoring upcoming economic indicators such as CPI, jobless claims, and PMIs, which could influence currency movements [17][21][25]. - The analysis suggests that the USD's decline since April is primarily driven by risk premium dynamics, with potential for further declines if US rates converge lower towards global peers [12][17]. Trade Ideas - **Long GBP/CHF**: Entry at 1.0927, target 1.12, stop at 1.055 - **Short USD/JPY**: Entry at 147.04, target 135, stop at 151 - **Long EUR/USD**: Entry at 1.1686, target 1.20, stop at 1.11 [16].

Summary of Key Points from the Conference Call Industry and Company Involved - **Industry**: Foreign Exchange (FX) Market - **Company**: Morgan Stanley & Co. International plc Core Insights and Arguments 1. **Risk Premium Dynamics**: The risk premium has been the primary factor influencing the USD's movements post-Liberation Day, currently estimated to be around 6-8%, having halved from its peak. There is potential for it to rise again, leading to a weaker USD [1][7][34] 2. **Rate Differentials**: While rate differentials remain relevant, they have not changed significantly. The DXY risk premium is currently at 6%, with EUR/USD showing an even higher risk premium of 8% [7][34] 3. **Future Expectations**: There is a belief that the risk premium could exceed previous highs due to ongoing policy uncertainty and FX-hedging flows, which investors may be underestimating [7][34] 4. **Trade Recommendations**: The company recommends maintaining long positions in EUR/USD and short positions in USD/JPY, with specific targets and stop-loss levels provided [10][12] 5. **FX Hedging Impact**: Increased FX hedging, particularly from European investors, is expected to influence the currency dynamics significantly. The hedge ratio on US assets is projected to rise, which could further affect the USD negatively [30][31][34] Additional Important Insights 1. **Convexity in USD Weakening**: The relationship between USD and rate differentials may exhibit a convexity that markets have not fully appreciated, suggesting that lower US rates could lead to a more pronounced weakening of the USD [35][36] 2. **Historical Context**: The analysis indicates that without considering risk premium, EUR/USD should be trading around 1.07, highlighting the significant role of risk premium in current valuations [23] 3. **Market Sentiment**: The report suggests that market expectations regarding trade deals and USD positioning have influenced the risk premium, which saw a reduction in late July [27][29] 4. **Long-term Outlook**: Elevated volatility and uncertainty regarding US trade, fiscal, and monetary policies are seen as catalysts for potential increases in risk premium, which could further weaken the USD [34] This summary encapsulates the critical insights from the conference call, focusing on the dynamics of the USD in the FX market, the role of risk premium, and strategic recommendations for investors.

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Key Takeaways from the FX and Rates Sentiment Survey Industry Overview - The survey focuses on the foreign exchange (FX) and rates market sentiment, particularly regarding the US dollar (USD), Euro (EUR), and emerging markets (EM) currencies. It reflects the views of 42 fund managers with a total of USD 573 billion in assets under management (AUM) [7][9]. Core Insights 1. **Short USD Thesis**: The short USD remains the highest conviction trade for the rest of the year, despite being challenged by rising global growth concerns [1][3][20]. 2. **Global Growth Concerns**: There is a significant concern regarding a potential global growth slowdown, which could impact the short USD thesis [3][25]. 3. **US Exceptionalism**: The fading of US exceptionalism is a recurring theme, with expectations that both US equities and the USD may decline [1][32][33]. 4. **Investor Sentiment**: A strong majority of respondents expect the next Federal Reserve (Fed) chair to be more dovish, impacting market expectations [44][46]. 5. **FX Hedge Ratios**: Many investors prefer to increase their FX hedge ratios, indicating a cautious approach towards US assets [49][50]. Additional Insights 1. **Emerging Markets (EM) Sentiment**: EM FX and duration sentiment appears to have peaked, with a slight decline in positioning and views noted in August [15][94]. 2. **European Investment Push**: There is muted conviction regarding a broad-based European investment push, with concerns about EU defense spending and fiscal policies [22][61]. 3. **Tariff Expectations**: Most respondents expect tariffs against China to remain between 30-40% by the end of 2025, reflecting ongoing trade tensions [17][34]. 4. **Oil Price Expectations**: Expectations for oil prices are that they will remain range-bound between $60-69 per barrel, with some upside risks anticipated [36][37]. 5. **UK and Eurozone Sentiment**: GBP sentiment has turned neutral with bearish levels, while EUR sentiment remains bullish despite lighter positioning [110][103]. Potential Risks and Opportunities 1. **Fed Independence Risks**: Nearly half of the respondents expect risks to Fed independence to manifest as a steeper US Treasury (UST) curve and a weaker USD [46][39]. 2. **Global Risk Appetite**: The appetite for risk-taking in portfolios remains lower than normal, with average cash levels reported at 3.3% [77][78]. 3. **Duration Exposure**: Global duration exposure has fallen relative to the previous month, indicating a cautious stance among investors [78][80]. Conclusion The survey indicates a complex landscape for FX and rates, with significant concerns about global growth, US fiscal policy, and the evolving dynamics of the Fed. Investors are adjusting their strategies accordingly, with a notable shift towards hedging and cautious positioning in the face of potential risks.

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Summary of Key Points from Morgan Stanley's G10 FX Strategy Conference Call Industry and Company Involved - **Industry**: Foreign Exchange (FX) Market - **Company**: Morgan Stanley & Co. International plc Core Insights and Arguments 1. **Bearish Outlook on USD**: The bearish case for the USD remains strong due to low carry-to-volatility ratios and limited upside from US rates, alongside potential political and macroeconomic risks [8][9][10] 2. **Comparison with Other Currencies**: The USD's carry-to-volatility ratio is unattractive compared to alternatives like GBP/CHF, making it a poor choice for carry-focused strategies [8][12] 3. **Market Pricing Adjustments**: Significant shifts in market pricing occurred after the July FOMC meeting, limiting further upside from US rate expectations [8][9] 4. **Asymmetric Downside Risks**: Policy and macroeconomic risks create asymmetric downside risks for the USD, with potential for a selloff even without a significant rise in US unemployment [8][21] 5. **Investor Sentiment**: There is little reason for investors to buy the USD, as common justifications for long positions are deemed insufficient [10][11] 6. **Fed Rate Expectations**: Economists expect the Fed to cut rates below 3% in 2026, which could further weaken the USD [9][10] 7. **Risk Skew**: The balance of risks around the USD is tilted negatively, with a higher likelihood of a downward move rather than an upward one [19][20] 8. **Trade Recommendations**: Suggested trades include maintaining long positions in EUR/USD and GBP/CHF while shorting USD/JPY, with specific entry levels and targets provided [25][27] Additional Important Insights 1. **Economic Activity Monitoring**: The company emphasizes the importance of monitoring economic activity data alongside labor market data, as a decline in activity could lead to USD selling despite stable unemployment rates [23][24] 2. **Long-Term Narrative**: For medium-term investors, the narrative towards a weaker USD remains strong, while near-term investors may find the negative carry associated with USD trades unappealing [25] 3. **Valuation Methodology**: The report includes a detailed valuation methodology and risks associated with the recommended trades, highlighting the importance of understanding the underlying factors influencing currency movements [26] This summary encapsulates the key points discussed in the conference call, providing a comprehensive overview of Morgan Stanley's current outlook on the USD and related currency strategies.