Morgan Stanley: Systematic FX Strategy — Stress-Testing Subjective Views and Enhancing Conviction
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Key Views
The FX multi-factor strategy shows near-zero correlation with equity, rate, commodity, and volatility strategies. As a capital-efficient overlay on a 60/40 portfolio, the Sharpe ratio rises from 0.78 to 1.54, while average returns across selected crisis periods improve from -8.9% to -5.5%.
EM local-currency debt foreign inflows recovered to approximately $20.8 billion year-to-date, exceeding roughly $15.3 billion in the same 2025 period.
Outlook
The bearish USD view depends on the Fed funds rate tracking below consensus. USD/CNH may decline toward around 6.70, though upside may prove limited beyond that level. The report favors SGD, expects modest KRW appreciation, and views TWD weakness as a buying opportunity. South Africa is expected to hike 25 bp; Hungary to cut 25 bp to 5.75%.
Recommended Securities
Asia rates: pay 5-year INR NDOIS; add 1s5s THB NDTHOR steepener. Morocco: buy EUR31s vs. EUR35s (target 44 bp, stop 10 bp). South Africa: buy SOAF 2030 vs. 2036 (target 85 bp, stop 45 bp). Ghana vs. Zambia: buy Ghana 2035 vs. Zambia 2033.
Key exhibits
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