Morgan Stanley: Here's How You Trade Today's Monster Rally In The Euro

Euro europe

Photo: Lars Aronsson, Wikimedia Commons

The euro soared today after German Chancellor Angela Merkel and French President Nicolas Sarkozy promised to have a solution to the Eurozone debt crisis by the end of the month.Morgan Stanley has some trading advice for you: short it.

Here’s what they said in a note to clients this afternoon:

…Risky assets have rallied today on very thin liquidity, following weekend reports that Germany’s Merkel and France’s Sarkozy have set a deadline to unveil a bank recapitalization and economic coordination plan for beleaguered Eurozone institutions. However, we are still inclined to view such price action as a bear market rally that offers opportunities to sell risky assets, as described in last week’s FX Pulse: Bear Market Rally.

The prospect of a bank recapitalization plan does not alter our bearish view on EUR. If the private sector proves to be an inadequate source of recapitalization, and government-funded solutions jeopardize the credibility of Europe’s sovereigns, the ECB may be left as the “last man standing” to shore up European banks. Thus, monetization of debt by the ECB could weaken the EUR long term. A mediocre growth outlook, increasing funding stresses, and conflicting signals from policymakers ought to further weigh on EUR in the medium term. We enter short EUR/USD at 1.3680, targeting 1.2860.

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