MORGAN STANLEY: It's Time To Buy The 'Currency War' Basket
Last week, Morgan Stanley's Manoj Pradhan warned that Japan had "changed the game" and would likely retaliate against other central banks that would attempt to weaken their own currencies.
Here's Morgan Stanley today:
Policy-driven JPY weakness has re-ignited concerns of a race to the bottom in currency markets, particularly as global growth limps along. To be fair, “currency war” is probably not the best term to describe the current FX environment. First, we’d argue that Japan PM Abe’s initiatives are designed to propel Japan from its 20-year battle with deflationary pressures. A weaker JPY is integral to this policy, but the intention is not to inflict pain directly on Japan’s competitors. Moreover, a stronger Japanese economy would be supportive to global growth. Second, verbal and actual intervention in EM is nothing new, and we still expect some EM currencies to appreciate in 2013, particularly in [Asia excluding Japan].
Still, it’s undeniable that (1) extraordinary monetary stimulus from DM countries has collapsed real interest rates, often leading to currency weakness; and (2) a number of EM and DM policymakers have either raised concerns on domestic currency strength or intervened directly to maintain export competitiveness. Recent price action in [the Korean won] and [New Taiwan dollar], for example, is a powerful reminder of policy-driven trend reversals. Investors must stay watchful for currencies that can devalue on aggressive policy action.
But with so many countries unleashing easy monetary policy, who will be the winners and losers?
Morgan Stanley's Evan Brown And Marc Englander introduced their "Currency War" basket, which includes six currency trades (see below). Effectively, they're arguing that Japan (JPY), Korean (KRW), and Peru (PEN) will be more successful at depreciating their currencies than the Europe (EUR), New Zealand (NZD), and Mexico (MXN).
We'll keep an eye on this.
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