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In case you missed it, the euro has been on a tear against the dollar as the world has become increasingly confident that a solution to the European debt crisis is near.However, this has been a disaster for Morgan Stanley who on Monday recommended shorting the euro against the US dollar. Here’s what Morgan’s Global Currency Research Team, led by Hans Redekar, said in an October 10 note:
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.
Just five days later, they had to pull the plug on that trade. In a note on October 14:
Following the sharp market rally into the weekend, we were stopped out of our short EUR/USD [trade]…at 1.3860…
Short EUR/USD has been a frustrating trade for us; we remain sceptical that European policymakers will find a viable fiscal solution to Eurozone woes in the medium term. Indeed, we are still focused on the weakening European economy and increasing prospects for debt monetization. Nevertheless, the bear market rally has proven more powerful than we initially anticipated.
Morgan Stanley continues to be bearish the euro, forecasting $1.30 for Q4 of this year and $1.25 for Q1 2012.