The market has been viewing the EUR decline as purely cyclical but they are mainly structural in nature, says Morgan Stanley.
MS outlines 3 mains sources for generating structural outflows from EUR.
1- Portfolio outflows – driven by further ECB easing at already extremely low yield levels, even negative yields at the front end of the curve in core Europe.
2- Bank lending – signs that European banks are starting to lend abroad, again highlighting the emergence of EUR as a funding currency.
3- Central bank reallocation – IMF data show EM central banks reducing exposure to EUR in FX reserves – a trend we expect to be extended by negative yields in.
"Hence, while the extreme level of short-term speculative positioning can leave EUR exposed to bouts of volatility and risk-reduction, as has been seen in recent days, we expect these episodes to remain short-lived, with the structural EUR downtrend remaining in place," MS argues.
"We reiterate our EURUSD 1.1200 forecast for end-2015 and view EURUSD rebounds as providing renewed selling opportunities. We also expect EUR weakness on the crosses, with EURJPY set to move below 130 over the medium term, in our view," 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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