Citi and Morgan Stanley get bullish on emerging currencies

Investment managers at Citigroup Inc. and Morgan Stanley expect US inflation peaking, along with monetary easing by the Federal Reserve (Fed). If so, emerging market currencies are likely to be their first stop. 

On Monday, Citigroup strategists, including Luis Costa, lowered the outlook on the dollar from "overweight " to " neutral " within the bank's model portfolio. These moves came amid a risk narrowing for equities and bonds. The securities mentioned failed to react to a series of news that could exert a downward pressure. The list included China's introduction of Covid Zero policy and issues with US corporate performance. 

Last week, analysts at Morgan Stanley also upgraded emerging market currencies from bearish to neutral against the dollar. Experts noted the worst scenarios to be over. 

Strategists believe that the protracted phase of the Fed's tightening cycle, and fair expectations of higher interest rates, show lower risk and return ratios, even if long dollar positions continue to strengthen. Emerging market currency weakness is considered unlikely, particularly relative to the current performance.