The EUR regime has shifted, says Morgan Stanley.
"In the past, no news was good news for the EUR as portfolio inflows supported the common currency. Going forward, we believe that the natural drift in EUR will instead be lower, as investors are compensated for removing the currency risk of their European assets. Meanwhile, the MS FloMo is signaling little pickup in unhedged equity flows into Europe, even after Draghi’s large-scale easing," MS clarifies.
"We remain bearish on EUR and look for a rebound to sell again. We are cautious on the common currency, as we expect the EUR to gradually transition into being a funding currency as European banks look to lend abroad after the asset quality review," MS adds.
"Indeed, the smaller-than-expected take-up from the TLTRO operation could fuel market opinion that the ECB needs to do more easing, further weakening the EUR," MS adds.
In line with this view, MS re-instated EUR/USD short position from 1.2920 in its strategic portfolio targeting 1.20, and as short-term trade from 1.2900 targeting 1.22.
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