Back in Early August, Morgan Stanley reflected its structural bullish USD views in a very interesting note entitling 'In USD We Trust'. EUR/USD was trading around 1.34 at that time and MS was riding 2 short EUR/USD trades from around 1.3620 and 1.3360. With the USD ongoing breakout, MS reiterates its bullish view on the greenback seeing a room for further strength against the EUR.
USD Breakout:
"The USD move is accelerating as the FOMC slack debate heats up. The FOMC Minutes suggested that as employment continues to improve, language around ‘significant underutilization’ will have to be modified. Solid US data and further economic growth should ultimately lead the market to price in a less dovish rate path. This would lift USD against currencies with weaker fundamental backdrops like EUR, JPY, CHF and CAD," MS projects.
No EUR Value:
"Meanwhile, the ECB’s policy tools to revive the ailing economy have become a constraint. Lowering the value of the EUR has become an obvious monetary policy goal, explaining why a declining EUR is now taken as a bullish sign by European asset markets. The weakening exchange rate is now an indicator of the success of the ECB’s easing approach," MS argues.
"This interpretation makes sense as declining sovereign spreads failed to reduce peripheral private sector funding costs, as shown in Exhibit 3, and implicitly failed to raise private sector credit supply. Nowadays, low sovereign bond yields will help reduce the foreign value of the EUR. This is best illustrated by Exhibit 4 showing volatility-adjusted yield differentials no longer support peripheral bond markets," MS adds.
In line with this view, MS maintains a short EUR/USD in its strategic portfolio from 1.3620, with a profit-stop at 1.3360, and a target at 1.31. As a short-term trade, MS maintains a short EUR/USD from 1.3360, with a profit-stop at 1.3330 and a target at 1.31.
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