The ongoing risk setback reinforces the argument that moderate asset retreat is no longer working in favor of the USD, which has emerged as an asset currency, notes Morgan Stanley.
"The EUR and the JPY are the new funding currencies suggesting a mild and temporary pause in risk drives a USD correction,"MS argues.
Interestingly, MS also nnotes that FX volatility has moved inversely with high yielders (HY) and falling commodity prices increase the risk that HY vulnerabilities remain for longer.
Thus, with the rising FX volatility spilling over into share market, the USD comes under selling pressure especially against currencies with net foreign assets such as JPY.
"Against higher yielding currencies the USD correction should be weak suggesting AUDJPY or NZDJPY shorts," MS advises.
In line with this view, MS maintains a short NZD/JPY position from 92.50 targeting 88.00
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