Investors looking to profit from a “Goldilocks” environment where US stocks rally but Treasury market losses are contained should short the dollar, according to a new study published by Morgan Stanley.
This scenario for US assets was among eight analyzed by the bank in a historical look at the US currency’s linkage to daily returns in the S&P 500 and the benchmark 10-year Treasury note.
The dollar’s performance relative to other assets took center stage earlier this year when the greenback sank alongside equities, marking a departure from the currency’s traditional status as a haven. Since then, the dollar’s traditionally negative correlation to equities has returned: The S&P 500 rocketed to a fresh record earlier this month even as the US currency trades adrift.
“The dollar’s correlation with risk and rates has shifted over time,” a Morgan Stanley team including Molly Nickolin and Andrew Watrous said in an Oct. 20 report. “Recognizing repeatable setups lets investors identify patterns across macro cycles.”
Over a longer time horizon, Morgan Stanley sees a clear pattern during the last 25 years, one that fits more with the prevailing wisdom that the dollar falls when equities rally and vice versa.
