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Morgan Stanley is increasingly bearish on the euro.”The euro’s fundamental outlook has weakened further over the past week. Global economic indicators have come in soft, which is especially bad for the highly indebted countries of peripheral Euroland.”
The US economy isn’t exactly going gangbusters. Furthermore, Morgan Stanley notes that a stronger-than-expected operation twist hasn’t been well-received.
But, it’s important to keep in mind that currency trades are all about about relative performance. That’s why Morgan Stanley likes the US dollar…
“[M]arkets remain unconvinced that [operation twist] will have any material impact on easing financial conditions. Global growth is occurring in a scenario in which monetary policy is limited and fiscal policies are restrictive. As such, the markets are likely to increasingly question risk positions and the dollar will reign supreme, in our view.”
…and the Japanese yen.
“Recessionary risks are on the cards for many developed market economies and the markets are increasingly questioning the ability of the emerging markets to support global demand. As such, we expect continued appreciation in the safe-haven currencies, namely USD and JPY.”
They’re bearish on Sterling, the Aussie, the Loonie, and the Kiwi.
“GBP is particularly vulnerable to the Euro area downturn, while persistent funding strains should further undercut high-beta FX. And commodity prices have started to roll over, adding fuel to the fire facing AUD, CAD and NZD.”
Morgan Stanley recommends going long a basket of USD and JPY against a basket of GBP, AUD, CAD, and NZD.
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