EUR's Pillars Of Support Crumble; We Stay Short

There were three main EUR-supportive flows that drove EUR/USD beyond what interest-rate differentials would suggest over the past two years, notes Morgan Stanley.

These 3 flows, according to MS, are (1) foreign buying of peripheral bonds, (2) foreign buying of equities, and (3) official sector reserve diversification into EUR.

"We think all three flows are slowing and will continue to do so over coming months, leading EUR to trade more in line with macro fundamentals," MS argues.

And here is what MS thinks will happen as the flows slow..

First, peripheral yields offer little risk adjusted return to foreigners at these valuations. Meanwhile, ECB policies are encouraging European institutions to buy domestic bonds, crowding out foreign investors.

Second, global equity investors are now much closer to historical benchmark allocations to Europe, just as European growth concerns increase. Should domestic economic data trend lower and geopolitical concerns rise, company earnings will deteriorate, weighing on European equities.

Finally, slower reserve accumulation in China and other EMs should weigh on diversification into EUR and other currencies.

"With the EUR’s ‘cushion’ fading, we look for 1.3295 near term and 1.31 in the medium term," MS projects.

In line with this view, MS maintains a short EUR/USD position as a short-term trade recommendation from 1.3600, with a revised stop at 1.3500, and a target at 1.31. MS holds a similar position in its medium-term portfolio from around the same entry (1.3620), with a revised stop at 1.3560 and a target at 1.31.

'This content has been provided under specific arrangement with eFXnews'.

Share: Analysis feed

eFXnews is a financial news and information service. Articles and other information distributed in this service and published on this site are provided in general terms and do not take account of or address any individual user's position. To the extent that some of these articles include suggestions as to various possible investment strategies which users might consider, they do so in only general terms without reference to the personal factors which should determine any user's investment decisions to buy or sell a specific security or currency.

The service and the content of this site are provided and distributed on the basis of “AS IS” without warranties of any kind either, express or implied, including without limitations, warranties of title or implied warranties of merchantability or fitness for a particular purpose. eFXnews and its employees, officers, directors, agents, and licensors do not also warrant the accuracy, completeness or timeliness of the information in any of the articles and other information distributed in this service and included on this site, and eFXnews hereby disclaims any such express or implied warranties; and, you hereby acknowledge that use of the service and the content of this site is at you sole risk.

In no event shall eFXnews and its employees, officers, directors, agents, and licensors will be liable to you or any third party or anyone else for any decision made or action taken by you in your reliance on any strategy and/or advice included in any article and other information distributed in this service and published in this site.