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Basically since the Fall of 2009, we’ve gone through several bouts of Euro-panic that either fade with some kind of bandage deal, or just fade because there are no new headlines to report.Now we’re back in Euro crisis mode, and in the firm’s latest FX Pulse, Morgan Stanley’s Ronald Leven warns: This Time Could Be Different.
The two things to realise: One is that Spanish weakness is growing more pronounced, and two that the appetite to just kick the can is fading, especially in Germany.
Ultimately though, look for more can kicking:
With the politics surrounding the European debt issues becoming more complicated, we would not be surprised to see this bout of EUR weakness persist for another few weeks. But ultimately we expect the focus on sovereign problems to fade once again and the EUR to rebound in line with our forecasts. Key to this view is that we do not think the sovereign issues will deter the ECB from continuing to hike rates this year and, as shown in Exhibit 2, the outlook for EURUSD remains tightly linked to the relative outlook for ECB tightening sooner and more aggressively than the Fed.
All that being said, there is another curveball and that’s slowing growth, especially in China, which should put a cautious sheen over everything.
We expect this more cautious risk environment to be reflected in FX markets more broadly, with over-extended liquidity- driven currencies likely to become more exposed. Hence, we would recommend increasing caution with the commodity currencies, especially the AUD, given its direct exposure to China. Moreover, we note that the latest Chinese trade data show a decline in iron ore imports from the peak at the beginning of the year. This is replicated in the Australian data where iron ore exports have declined sharply (although overall Australian exports to China have recovered according to the March data report). Historically, the AUD has correlated with Chinese imports of iron ore, suggesting that the risks for
the AUD are increasing.