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29.11.2016, 08:12

Top 10 trades for 2017 according to Morgan Stanley

"USD has entered its last leg within a secular bull market. We expect USD to be driven by widening rate and investment return differentials.

USD strength should be front-loaded against low-yielding currencies, particularly JPY and KRW.

Later in the cycle we see USD strength broadening out with the help of rising US real rates, specifically hitting high-yielding currencies. Higher real rates should eventually tighten financial conditions, increasing the headwinds for the US economy and marking the turning point for USD after 1Q18.

1) Long USD/JPY: Yield differentials driving outflows from Japan and higher inflation expectations.

2) Long USD/KRW: Diverging growth and monetary policy to increase outflows from Korea.
3) Short EUR/GBP: No new negative UK news allows the undervalued GBP to recover.
4) Long USD/NOK: Norway government's slower fiscal support to make long NOK positions adjust.
5) Short AUD/CAD: Reflects the diverging US-China economic growth stories.
6) Short SGD/INR: Relative external sector dependence, China exposure and debt overhangs.
7) Long USD/CNH: RMB weakens from capital outflows and diverging monetary policy from the US.
8) Long BRL/COP: We expect reform momentum and high yields to cushion external risks.
9) Long RUB/ZAR: Continued tight monetary policy should help RUB outperform.
10) Long CHF/JPY: Yield differentials weaken JPY, while CHF is a good eurozone political risk hedge".

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