- Morgan Stanley investment bank 2022-2023 foreign exchange forecast – updated May 2022.
- The dollar will continue to gain ground in the near term due to fragile risk appetite, but it is close to a peak.
- EUR/USD is expected to decline to 1.03 and potentially below parity by Q3 2022.
- The dollar will retreat next year with the resilience of the euro and the downward revision of Fed expectations.
- Sterling is unlikely to make a significant impression.
- However, the GBP/USD should find support near 1.20.
- The Canadian dollar is the best bet among commodity currencies.
Risk aversion supports dollar strength in the near term
According to Morgan Stanley, the dollar should maintain a strong tone in the near term with clear support from expectations that the US currency will benefit from the malaise in the global economy.
“The combination of lingering geopolitical uncertainties in Europe and Covid lockdowns in Asia should continue to fuel the ‘growth divergence’ narrative.”
He adds; “North America, with continued Fed and BoC policy normalization, economic insularity, healthy local balance sheets and buoyant savings, may be more insulated from the perceived global slowdown.”
Morgan Stanley, however, expects the dollar to top in early fall as the dollar index does not break out of its long-term range.
Two-way risks for the US currency
The bank also discusses the risks to its outlook for the US dollar.
He notes; “On the one hand, it seems there are a lot more ways to make things worse than to get better.”
A significant slowdown in growth and greater vulnerability in risk appetite would potentially trigger further USD buying and create an overshoot beyond its long-term range.
This would be a particular risk in the event of an escalation of the conflict in Ukraine and further deterioration in China.
It also features an opposite storyline; “Investors are also generally quite pessimistic, suggesting that the USD is more likely to peak sooner rather than later as pessimism hits its ‘bottom’.”
He adds; “Put simply, the faster and more aggressive the USD rally this summer, the more likely it is to peak sooner.”
Overall, the bank expects the euro to dollar (EUR/USD) exchange rate to weaken to 1.03 by the third quarter and may even exceed parity.
The bank still expects the eurozone outlook to be stronger than expected. He notes; “Increased optimism on EU integration and accelerated ECB normalization could take EUR/USD towards our bullish scenario of 1.14, while growth underexpectations could keep EUR/USD under 1.10.”
Regarding the yen, he expects the policy divergence to continue to undermine the yen. In this context, he adds; “We expect the JPY to be the preeminent funding currency in 2H22 and beyond.
Little Appetite for Sterling
Morgan Stanley expects the pound to tend to struggle with the Bank of England likely to fall short of market expectations, while political elements will also remain a negative factor.
Regarding the pound-dollar exchange, he notes; “GBP/USD is expected to remain in the 1.20 range, falling to 1.22 in 3Q22 before recovering slightly to 1.28 by mid-2023.”
Support in Canadian dollars
Morgan Staley expects the Canadian dollar to maintain a firm underlying tone with the support of hawkish policy from the Bank of Canada.
On the other hand, he expects the Aussie and the Kiwi to struggle in the near term due to unease over both the Chinese and global outlook.
We expect AUD/USD and NZD/USD to be the biggest laggards this summer as global growth and risk asset pessimism weigh on these currencies the most, although we expect a return to the average to levels close to current levels by mid-2023.
Morgan Stanley currency forecast table covering the period 2022-2023.
|Pair||place||Q3 2022||Q4 2022||Q2 2023||Q4 2023|
|EUR/NOK||10:20 a.m.||9.50||9:40 a.m.||9:20 a.m.||9:40 a.m.|
|EUR/EUR||10.50||10:60 a.m.||10.50||10:30 a.m.||10.03|