The underperformance of EUR-denominated assets suggests that real-money accounts have remained on the EUR selling side, notes Morgan Stanley.
Nonetheless, MS thinks that the EUR has rallied last week, partly due to leverage accounts adjusting positions in a marketplace where liquidity has become an issue.
De-positioning Provides Only Marginal EUR Support:
"When there are losses in one asset class, profit realizations elsewhere help reduce the P&L pain. DM FX offers liquidity, and investors were able to book profits on USD longs... Interestingly, the less-liquid EM markets saw less of an impact, which we cite as due to less-liquid market conditions and less-crowded positioning when compared to the EUR," MS clarifies.
Repatriation Next on the Agenda:
"Our US economic surprise index has peaked, as it has become more difficult to beat (inflated) expectations. The pure size of US foreign asset holdings explains why the USD tends to rally when there is risk-aversion. Should global risk appetite stay fragile, with markets fearing the US importing deflation and stagnant growth from the rest of the world, then the USD will see repatriation-related support kicking in again," MS adds.
"Soon, we expect USD bearish de-positioning to be replaced by USD supportive repatriation," MS projects.
In line with this view, MS maintains a short EUR/USD position from 1.28 and runs a limit order to sell EUR/USD bounces into 1.2950.
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