Five things to watch in markets in the week ahead
Investing.com - Morgan Stanley predicts the USD/JPY exchange rate will decline to 140 in the near term before rebounding to 147 by year-end, according to a new currency outlook released Monday.
The investment bank attributes the expected initial drop to increasing USD-negative risk premium and anticipated significant decreases in front-end interest rates in the coming months. Despite the projected year-end recovery to 147, the Japanese yen is expected to underperform compared to risk-sensitive currency peers.
Morgan Stanley suggests cross-JPY trades remain attractive investment opportunities, particularly when considered on a total return basis. This recommendation comes amid the forecasted volatility in the yen’s performance against the dollar.
The outlook also addresses the British pound, which Morgan Stanley expects to shift from a market leader to a laggard as the Bank of England implements rate cuts. This transition is described as moving more firmly into the "left-hand side of the ’sterling scowl.’"
The bank notes that while high carry/volatility has been a key source of GBP strength, increasing disinflation and labor market weakness are taking hold. As the BoE cuts rates to and eventually below neutral levels, Morgan Stanley expects the pound’s carry advantage to erode significantly.
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