MORGAN STANLEY: Delusional currency investors are making a huge mistake that could blow up in their faces - but these trades could save the day
- Hans Redeker, the lead global foreign-exchange strategist for Morgan Stanley, says investors are making a crucial mistake that could end up working against them.
- As a result of this misconception, Redeker says investors have temporarily moved more cash into the market, which is an unsustainable development.
- Redeker says FX traders need to minimize their risks. He suggests building a hedged position through long and short positions on various emerging-market currencies.
If you're investing in foreign currencies and feeling good, a top strategist for Morgan Stanley says you might be missing a potentially damaging trend bubbling under the market's suface.
Hans Redeker, the head of global foreign-exchange strategy for Morgan Stanley Investment Management, says investors have started acting like market liquidity is on the upswing when it's actually shrinking. And he warns that's not sustainable.
"Markets seem to be trading on an illusion of ample liquidity, with volatility at almost historic lows, gold prices rushing higher despite the US dollar remaining within a tight trading range and equities breaking higher as the bond market treads water," he wrote in a recent note to clients.
The problem is that liquidity isn't growing at all. Savings in Europe and Japan are down, while the Federal Reserve's balance sheet is shrinking, Redeker says. And of the 10 largest central banks in the world, only Japan's is still buying assets and simulating the economy.
Relative to gross domestic product growth, Redeker finds that the balance sheets of those banks are falling at the fastest pace since 2008, right around the time of the Great Recession.
"Market liquidity has not been supported by rising assets or increasing global net savings," Redeker said.
His view is that recent shifts made by banks have encouraged investors to spend more cash, but several other factors pushing are liquidity lower. In his mind, that can't last, and neither can a rally based on that "illusion."
He continued: "These shifts can only be of temporary nature and are unlikely to promote a longer-term risk bull trend."
Redeker notes that investors were pleased when inflation forecasts started to falling last year, but they're already on the rise as oil prices increase. Meanwhile, projections for corporate earnings growth are falling, with rising wages and other input costs a contributing factor.
Redeker, whose firm has $471 billion in assets under management, made a series of recommendations designed to minimize risks for investors who could get hurt by the backlash. His suggested positions include:
- Long on the Japanese yen, Chilean peso and Brazilian real
- Short on the Russian ruble and Indian rupee
- Mixed positions on emerging market currencies based on individual opportunities