Photo: markusram via Flickr
Morgan Stanley has been bearish on the euro for a while now. Its Global Currency Research Team thinks it’ll fall to $1.30 in Q4 of this year and to $1.25 in Q1 of 2012.From time-to-time, Morgan Stanley will recommend taking a tactical (i.e. short-term) short positions in the euro, which is exactly what they did on Thursday.
They argue that the Eurozone’s existing problems are only being compounded by the recent spike in Italy’s borrowing costs. Here’s what they said in their November 10 note:
The bad news from Europe sent Italian bond yields to now near 7%, which is unsustainable for a debt market of 1.9tr EUR (third largest in the world). This means that Italy will need to spend nearly 10% of its annual GDP on interest payments alone. Meanwhile, adding to the economic and financial uncertainties over the Eurozone, a political cloud presents new risks with new regimes in Greece and Italy. We remain fundamentally bearish on EUR, and believe it will retest 1.30 as Italy runs the risk of being “too big to save.” We look to short EUR/USD at 1.3750.
Their specific target is $1.3050 for the euro. They entered the trade at $1.3750. And they’ll pull the plug on the trade if it goes to $1.3950.
Last month, following a huge rally in the the euro, Morgan Stanley recommended a very similar trade. But they they got stopped out of that trade after just five days when the euro unexpectedly rallied.