Global FXEM Strategy_ FX Forecast Update

Summary of Key Points from Morgan Stanley FX Forecast Update Industry Overview - The document pertains to the Foreign Exchange (FX) and Emerging Markets (EM) strategy, specifically focusing on currency forecasts and market dynamics as of February 14, 2025. Core Insights and Arguments 1. Adjustment of FX Forecasts: Morgan Stanley has revised its FX forecasts due to changes in the Federal Reserve's outlook and U.S. Treasury (UST) yield expectations. The forecast indicates a more moderate decline in the USD on a DXY basis and a flatter profile for EM currencies [1][11][14]. 2. DXY Index Projections: The DXY is projected to be at 103 by the end of 2025, an increase from the previous forecast of 101 and the current level of 107. This suggests a bearish outlook on the DXY despite the upward revision [11][22]. 3. Emerging Market Currency Performance: A flatter total return profile is anticipated for EM currencies, with the Asia Ex-Japan (AXJ) region expected to underperform. The document highlights that positioning and sentiment have turned less bullish on the USD, reducing upside risks [11][24][33]. 4. Impact of U.S. Trade Policy: April 1 is identified as a critical date for observing developments related to the "America First Trade Policy," which may influence currency dynamics [11][14]. 5. G10 Currency Forecasts: The report includes revised G10 FX forecasts for 2025, indicating specific currency pair expectations, such as EUR/USD at 1.05 and USD/JPY at 152 in 1Q25 [19][40]. 6. Regional Currency Dynamics: - In Latin America, the Colombian Peso (COP) is expected to depreciate gradually, with a revised year-end forecast of 4,500 from 4,800 previously. The Brazilian Real (BRL) remains sensitive to fiscal headlines, with a forecast of 5.80 for 1Q25 [28][31]. - AXJ currencies are projected to remain weak due to tariff risks, with the Indian Rupee (INR) expected to weaken more in line with other AXJ currencies [33][34]. - The South African Rand (ZAR) is anticipated to face ongoing pressure from tariff risks and a tough stance from the U.S. [36]. Additional Important Insights 1. Market Sentiment: The report notes a shift in investor sentiment, with fewer investors remaining bullish on the USD, which may reduce the potential for unexpected positioning unwinds [16][17]. 2. Asymmetry in Risks: There is a noted asymmetry in risks surrounding the DXY, with positive positioning still present but reduced, while investor sentiment towards global outcomes remains negative [17]. 3. Total Return Expectations: Morgan Stanley expects the highest total returns from the Australian Dollar (AUD) and Japanese Yen (JPY) in 2025, while the Canadian Dollar (CAD) and Swiss Franc (CHF) are expected to lag [20][24]. This summary encapsulates the key points from the Morgan Stanley FX forecast update, highlighting the adjustments in currency outlooks and the implications for various regions and currencies.