Demand for dollars is falling, and set to fall further, according to Morgan Stanley. Below they use U.S. capital flow data, into equity (TIC, below), to forecast Balance of Payments (BoP) data. Given a slump in the former, they expect an upcoming drop in the latter — which means that capital flows will put pressure on the dollar’s value in the near-term
As equity investments are typically unhedged on a currency basis (when investors buy foreign equities they buy the underlying currency), they tend to be more important for currency analysis.
The latest TIC data to June shows that USD demand from equity investors fell quite sharply in Q2, with USD30bn of net equity outflow from the US, the biggest outflow since September 2007. This combined with a recent deterioration in the US trade deficit might be an early indication that the broad basic balance of payments (current account plus FDI plus portfolio flows) is about to weaken and hence undermine the dollar.
We have decided to leave the portfolio unchanged this week and we remain short USD. We like owning the KRW against JPY given the huge misalignment of this cross. We also think short NZD/CAD and short AUD/SGD offer good relative value opportunities. The NZD is the biggest short in the portfolio at 20%, with the biggest long being in CAD at 20%. We are also tightening the stop on our short EUR/CHF trade to 1.3150 to protect profits. Elsewhere, we continue to look to sell USD and possibly GBP against SEK and NOK.
(Via Morgan Stanley, Dollar Nadir Ahead?, Stephen Hull, 2 Sep 2010)