M Global IdeaGlobal Macro StrategistEnter the DragonMorgan Stanley & Co. LLCMatthew HornbachStrategist Matthew.Hornbach@morganstanley.com +1 212 761-1837 Guneet Dhingra, CFAStrategist Guneet.Dhingra@morganstanley.com +1 212 761-1445 Andrew M WatrousStrategist Andrew.Watrous@morganstanley.com +1 212 761-5287 Efrain A Tejeda, CFAStrategist Efrain.Tejeda@morganstanley.com +1 212 761-3529 Francesco GrechiStrategist Francesco.Grechi@morganstanley.com +1 212 761-1009 Zoe K StraussStrategist Zoe.Strauss@morganstanley.com +1 212 761-0407 Allen F LiuStrategist Allen.Liu@morganstanley.com +1 212 761-6049 Morgan Stanley & Co. International plc+James K LordStrategist James.Lord@morganstanley.com +44 20 7677-3254 David S. Adams, CFAStrategist David.S.Adams@morganstanley.com +44 20 7425-3518 Eric S OynoyanStrategist Eric.Oynoyan@morganstanley.com +44 20 7425-1945 Lorenzo TestaStrategist Lorenzo.Testa@morganstanley.com +44 20 7677-0337 Fabio Bassanin, CFAStrategist Fabio.Bassanin@morganstanley.com +44 20 7425-1869 Marie-Anais C FrancoisStrategist Marie-Anais.Francois@morganstanley.com +44 20 7425-1877 Dominic J KrummenacherStrategist Dominic.Krummenacher@morganstanley.com +44 20 7425-9781 Morgan Stanley MUFG Securities Co., Ltd.+Koichi SugisakiStrategist Koichi.Sugisaki@morganstanleymufg.com +81 3 6836-8428 The Year of the Dragon may bring something other than longevity to the economic expansion and prosperity to financial markets brought by the Year of the Rabbit. A year with less liquidity provision and fiscal support raises downside risks, which should keep safe havens dear. Stay long duration.Global Macro StrategyWe discuss the underappreciated fiscal and liquidity backdrop to US economic resilience in 2023, and how that backdrop should change this year. We also discuss how changes in long-end Treasury supply appear to have little bearing on auction tails, but matter for the USD.Interest Rate StrategyWe stay long duration in the US via long 5y USTs. We close pay Apr ECB OIS meeting and enter Jun 24 1y midcurve 97.875/98.250 strangle; we close 10s30s OAT ASW Box and enter RX/UB invoice spread steepener box; we enter a receive position on EUR 5y5y (vs 6m) and maintain EUR 5y5 vs 20y5y steepener. In cash, we keep our structural short 10y BTP versus Bund. We maintain receive May'24 MPC and long UKT 1T37 vs. short UKT 1T57, and we also keep our short 15y ASW. We maintain receiving 2y OIS, short 30y JGB ASW. We enter long 20y JGBs on 10s20s30s fly.Currency & Foreign ExchangeWe think it's too soon to turn USD bullish, but risks are skewed to the upside. GBP could gain from the UK March budget should it amplify its carry/vol ratio further. We shift from short GBP/NOK to short CAD/NOK positions. We analyze whether Treasury auctions matter for USD and find that the USD is particularly sensitive to yield moves driven by 10y and 30y auctions. Stay long NOK/SEK given rising risk of aggressive cuts from...
