MoraanStanleyRESEARCHGLOBALFOUNDATIONNovember20,20211224AMGMT2022Global MacroStrategyOutlookMatthewHornbachMathewtHombach@morganstanley.com+1212761-1837The Journey Toward Tighterneet Dhingra,CFAa.Dhingra@morganstanley.com+1212761-1445Financial ConditionsDavidS.Adams,CFAwds.Adams@morganstanley.com+1212761-1481In 2021, central banks and governments drove an easing inAndresJaimefinancial conditions with extraordinary stimulus. In 2022,+1212296-5570macromarketswill begin a journey toward tighterfinancialndrewMWatrousconditions accompaniedbyprotection from still abundant+1212761-5287KelcieGersonliquidity. We see rates and the US dollar rising further.+1212761-3983Henry SteckGlobalMacroStrategy+1212761-3168mesKLordJamaTEGIS+44207677-3254morganstanley.comainadirectionconcictentwithlooserEric SOynoyanctadeclineininflationrisk oremlums. rising crowthexoectationsand@morganstanley.com+44207425-1945albank polctestoputupward pressureonrealb the3rdhighestamountofG7netWantingLow@morganstanley.co+442074256841+a2007.TheUSDshould alsosek:TengKhoo@morganstarley.com+442074253842JohnKalamar as@morganstanleycom+44207677-2969Alina Zaytseva+44207677-1120forhigheryieldsin 202:Fed willlead the market to push out rate hikes, and price a higheinal rate.10v vields end 2022 at 210%. We suggestU2Z3steepenersed in this257520s buttefily.In the euro area, the faling path innegativefthe ECBOEtanering. allowing long-termrates to pealgradual widening oressures.In theUK. thelimited BoE tightenin g combined with the end of APF reinvestments call forsignificantcurvesteepening.Inlapan.weseehigherIGR vieldson thabadlas only a single factor in makingtheAustraliancurveasBoChikescontrast withRBAbatienceCurrency8&ForeignExchangeWesepanun-and.down202?fortheUSD. with theDXYfirminefuthericIpersonsofFINRAandmaynot2022 aspolicydivergence pivots topolicy convergence.EUR/USD weakens,es and trading secarntes held by a esearchto 112amid growth and policy divergence,before recoveringto1.18by end
MorganStanleyGLOBALFOUNDATIONRESEARCH2022as thedivergence fades.USD/PY hasroomto alyfurther on thecombination of higher US real yields and benign financial conditionsGBP/USD holds the 134-1.35 ran ge and allies to 138 in 2H422 butlags threst due to its tepid growth outlook.NOK and SEK strengthen by theendof2022 on robust lobal and local,growth, and the Riksbank poins in onpolicy tightening CHFunderperforms the rest ofG10against USD as USreal yieldsrise.AUD)/USDholdsfim around.0.75 beforestagingalate-2022rallyto O79. NzD/USD firmsmodestly to 0.73 on a weaker USD butCADdeclinesto 1.12 as oil prices and BoCi the strength of the US economy and the stage ofsesthe risk of faster policy normalization. Wefavourlong FXvolatlity positions with upside USD exposure.Inthe US wesee10 breakevensat240% by the end of 2022, as CPinflation comes off the boil. We see 10y real yields rising to-0.30% by theend of 2022, asnominal vields rise and breakevens decline,poppingthedouble-bubble in real yields. We cover three topics on US inflation-(1a themasin the CPlbasket.(2)the shelterinf...
