“The EUR’s rise since mid- 2012 was driven by(1) large foreign flows into European equities and peripheral bonds and (2) the reluctance of European institutions to recycle the country’s growing current account surplus”
Says Morgan Stanley in a note. They see the flows into Europe abating if the ECB go negative on rates.
“With Eurozone assets already less attractive to foreign investors, should the ECB cut rates negative next month, we believe that outflows, hedge-related or otherwise, would accelerate”
They match their analysis with a short call on EUR/USD at 1.3780 with a stop at 1.40 and profit target at 1.3200. That matches Credit Agricole’s short at the same level.
A slow down or a switch to other global regions such as the US or Japan will stem the rise in the euro and they would like to be short in such a case. They also see the euro becoming a funding currency which will also limit it’s rise. If that happens then high yielding currencies will benefit (AUD, NZD for example).
ForexLive has long been noting that a big part of the euro’s strength has been down to inflows and we need to be very vigilant if that starts to show signs of tailing off. Whether we start seeing flows doing a 180 remains to be seen but if so it will be a very bearish signal for the euro. It’s something to keep in mind as these inflows won’t last forever.
At the moment there’s still plenty of scope for decent returns on Europe as it hasn’t really started recovering yet. If it does that will remain euro supportive.
EFX carry the note here
