Morgan Stanley has abandoned its call for the euro to plunge below parity with the US dollar

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Morgan Stanley has abandoned its forecast for the euro to plunge below parity with the US dollar, predicting that the common currency will now strengthen even further against the greenback, in top of its recent rally.

Here’s a list of its major forecast changes released over the weekend.

Source: Morgan Stanley

There are some pretty significant revisions, particularly towards European currencies.

“We revise EUR higher as the currency has become positively correlated with growth and political uncertainty has diminished,” the bank said in a note released on Sunday.

“EUR has turned into a pro-risk currency, rallying when growth expectations rise as foreign equity inflows pick up, and our EUR/USD and EUR cross projections reflect this outlook.”

The EUR/USD has rallied 9% from early January this year, coinciding with a sharp reduction in short speculative positioning based off recent data released by the US Commodity Futures Trading Commission (CFTC).

Along with the euro, Morgan Stanley also likes the look of Central and Eastern European currencies, particularly the Polish Zloty.

“Growth continues to recover across the region, boosted by the better prospects within the EU/eurozone more broadly. The next moves for central banks are likely to be toward tightening, while valuations are attractive,” it says.

The bank has also lifted its forecasts for other emerging market currencies such as the Malaysian rinngit, Indonesian rupiah and Mexican peso.

“We like MYR on valuation and growth grounds, as well as INR and IDR, while we think MXN will be one of the strongest performers,” it says.

While the bank sees the US dollar weakening against most emerging market and European currencies, it says that it will continue to strengthen against the Australian and Canadian dollars, and especially the Japanese yen.

By the end of this year, Morgan Stanley sees the AUD/USD falling to .7000 with the USD/CAD lifting to 1.42. The USD/JPY is expected to rise to 120.

The bank’s favourite trades right now include being long EUR vs USD, JPY, CHF and GBP, and short AUD/USD. It also likes being short EUR/PLN and short USD/MYR.

The tweaks to its forecasts will likely attract plenty of attention, both from trend and contrarian traders alike.

NOW READ: Traders are scaling back their bets looking for US dollar strength

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