Morgan Stanley Sees USD Correction Risk

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Given that USD has switched from a funding to an asset currency, there is now a large USD long position in place, which suggests that if the historical pattern of position-reduction is repeated this year, there is the risk of a USD-corrective setback, according to Morgan Stanley.

Indeed, as well as USD long positioning reaching an extreme, many technical indicators also point to current USD price action becoming over-extended and vulnerable to a correction. While we maintain our bullish USD view over the medium term, we would highlight the risk of a near-term corrective setback on seasonal position adjustment.

The firm went on to suggest,

  • Hence, we now recommend caution with USD long positions for the next few weeks.

    • In line with that view:

  • MS tightened the profit-stop on its EUR/USD short to 1.2550. The trade entered at 1.2750, with a target at 1.20.
  • MS also raised the entry level on its limit order to sell EUR/USD from 1.2550 to 1.26.
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