With the U.S. dollar receiving a heaping helping of positive expectations for price increases in the face of Fed rate hikes, among the worst performing currencies in 2016 is the U.S. dollar, a 2016 Morgan Stanley Cross-Asset Survey showed. This outwardly surprising selection for the U.S. dollar to falter comes as prognosticators have predicted numerous Fed rate hikes in the middle of an odd U.S. presidential election season in part driving the U.S. dollar positive trade thesis. But all is not well in the dollar bull camp, as a one-time whisper questioning the bull logic appears to be taking hold among institutional investors to a certain degree.

Institutional investors see dollar among the worst performing trades

When asked “Which of these do you think will be the worst-performing currency in 2016, including carry?", the U.S. dollar was the fifth most popular choice. In a close fourth place was the much discussed pair in a relative value trade, the Euro.  The Euro is widely discussed as a currency that will benefit from continued rounds of quantitative easing vaporizing regional interest rates and making its currency weaker. What institutional investors in this survey are saying is that the long dollar/short euro trade is a thing of the past. What an amateur quant might say is that the dollar trade might be due for some mean reversion, as inefficient markets might have overshot fair value while a fundamentalist such as Tom Lee of Fundstrat Global Advisors, making the early call on the U.S. dollar at the start of December 2015, says the demise of the long dollar trade is due to correlations and baked into the cake from a statistical standpoint.

Just looking at the statistical results of the end percentages resulting from this question, with the U.S. dollar at only 10 percent, however, it is apparent that a significant majority of institutional investors are not all on board the demise of one of the most crowded currency trades at the moment. When asked about the range for U.S. stock market volatility in 2016, the respondents were decisive in their answer.

Volatility range anticipated to expand in 2016, as institutions split on predicting next “surprise”

A strong 73 percent of institutional investors have pegged the average 2016 VIX market volatility in a range 15 to 20. Until late August of 2015, when the CBOE’s S&P 500 volatility measure touched the 40 level, the VIX traded frequently with a rolling price average mean near 14 at many times. In fact, volatility touched low points under 12  in a statistically rare calm.

While it wasn’t a point made in the study, with a new range comes new Vix trade variables. The new range from 15 to 20 – the numeric mean of which is 17.5 – could mean discretionary volatility traders are likely to play the Vix “rubber band” mean reversion hedge trade slightly differently in 2016, with the 24 level triggering the start of a leg-in strategy.

Volatility is often driven by surprise – which is one reason efforts to discuss risk management probability paths is often done with the goal to mitigate outlier exposure in a portfolio. When considering the “surprises” that might disrupt market tranquility, a divergence of thought among institutional investor groups is evident. Fully 50% of hedge funds think the Fed raising rates more than 4 times in 2016 will be the shock to markets – with some yield curve players whispering the Fed is likely to remain pat until inflation is more obvious – only 6% of pension funds and other institutional investors less prone to making adventuresome bets think the Fed interest rate hikes will surprise. Pension funds, by contrast think growth slipping below 2 percent – a decidedly deflationary expectation – is the market’s biggest surprise. In concert with this is their second largest concern, that U.S. high yield default rates climb above 6%.

Oil higher, say institutional players, but hedge and pension funds once again split on stock market opinion

Perhaps pointing to signs of inflation is the institutional investor’s expectation for the price of oil as basis Brent crude. Most institutional investors are looking at oil, as measured by the Brent contract, to trade near $50 – with hedge funds coming in the high end of that range.

Higher oil prices could indicate, to a degree, that the economic demand picture is expected to be positive – with supply concerns already priced into the market. When institutional investors looked at stock market expectations in the light of odd global divergences in quantitative easing and interest rates, there was a clear majority opinion that European stocks, priced in the local currency, would be the place to be in 2016. U.S. stocks, priced in dollars, is the market anticipated to have the most uninspired performance in 2016.

A significant divergence among institutional investors is once again visible in Europe when considering future interest rates, but institutional investors show a more unified front when considering the shape of the U.S. interest rate curve. Pension fund investors think the two- to ten-year spread on the German yield curve will flatten, while hedge funds and asset managers think the curve will steepen. However, sentiment on the U.S. yield curve is clear, the U.S. yield curve will flatten, over three quarters of respondents told the Morgan Stanley survey.