4 Reasons This FX Trade Offer An Excellent Risk/Reward

Morgan Stanley stays very convinced that EUR/JPY is set to break lower from here.

"There are a number of reasons why bearish EUR/JPY positions offer an excellent risk/reward," MS advises.

First is related to Greece: "JPY-based investors have significant EMU bond exposure. The Greek deal seems to have low international confidence levels, suggesting foreign investors including Japan may withdraw funds from EMU bond markets. Peripheral risk premiums would rise in this scenario, which doesn’t bode well for the EUR," MS argues.

Second is related to the ECB: "With Greece hanging on, but staying vulnerable leaving Grexit an option, the ECB has little choice other than to run very expansionary policies," MS adds.

Third, is related to EMU-based funds: "EMU-based faunds. including banks will find it difficult to generate adequate domestic returns within a non-optimal currency union. In this scenario, core EMU-based funds will reduce their peripheral exposure. Capital markets will get fragmented and less efficient. Core funds will export investment into non-EUR jurisdictions. The result is for the EUR to decline," MS clarifies.

Fourth, is related to the Fed: "Fed hiking rates has the potential to weaken risk appetite should higher US rates kick in when US corporate profitability has peaked," MS argues.

All in all, MS is looking to add risk negative positions to its FX portfolio.

"Bullish JPY and, to a lesser degree, the CHF and the USD fall into this category. Needless to say, in this case EURJPY would fall hard," MS advises.

This content has been provided under specific arrangement with eFXnews.

Share: Analysis feed

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.