Photo: Andres Rueda / Flickr
Morgan Stanley is out with a simple note titled: Closing EUR longs.That translates to English as: Dump your euros.
In the wake of the Italian election, Ian Stannard, head of Morgan Stanley’s European FX Strategy, says to use any rebounds in the euro as a chance to sell.
…the surprising Italian election results, which have increased the political uncertainty in Italy, will have broader implications for the EUR and currency markets generally, in our view. Hence, we would now look to use any EURUSD rebounds over the coming days into the 1.3150 area to close this long position, and await clarification/stabilisation of the political picture in Italy before re-entering bullish EUR strategies.
So what specifically is the issue?
Stannard puts it nicely. Essentially what’s kept Europe so calm over the last several months has been the ECB’s OMT program, which is a promise to buy peripheral bonds (and reduce national borrowing costs) provided said countries request the purchases and agree to structural reforms.
No country has actually requested the OMT be activated on their behalf yet, but just the knowledge that it’s there as a failsafe has been very powerful.
But the Italian election puts that at risk.
In order to activate the OMT, political authorities will have to apply and accept additional conditionality. This is what Italy’s electorate appears to have rejected. Other peripheral nations may also be concerned about contagion effects. Subsequently, bond spreads could widen, pushing the EUR lower.