From Morgan Stanley’s ‘FX Pulse’ client note (in brief … bolding mine):

  • Deflation Theme Broadens: Disinflationary/deflationary trends have become a broader G10 currency market theme.
  • Another round of weak G10 CPI readings over the past month highlights this trend, consistent with the lower-for-longer interest rate outlook
  • While historically such a muted rate environment would support risk and be USD negative, we believe this will not be the case this time.
  • … We expect the USD to extend gains, even in a lower-yield environment, as the US becomes an investment destination.
  • Lower US yields are the result of investment inflows and are unlikely to encourage funding for overseas investment, in our view. Hence, rebounds in higher-yielding currencies are likely to be temporary and we recommend only very tactical bullish positions here.
  • Selling EUR: Deflation leads to economic weakness, and with relative growth deciding real money portfolio shifts, we focus our USD long positions against disinflationary currencies.
  • The EUR tops our list in the G10.
  • Last week, we reintroduced bearish EUR/USD strategies to our portfolio.
  • This week, we broaden this strategy to bearish EUR cross strategies and EUR/JPY specifically

(Note, we had this earlier in the week from MS: Morgan Stanley load up on EUR/JPY shorts at 137.00)

It goes on:

  • Firm evidence of portfolio outflows from the Eurozone is emerging. Initially led by bond market outflows, our leading indicators suggest that equity markets outflows are also joining the foreign investor reduction of EUR exposure.
  • Moreover, it is not just portfolio flows. We also find that longer-term FDI flows are turning EUR negative, consistent with our view that the EUR decline will be sustained over the longer term.

Also note, yesterday we had 6 negatives pointing to more downside for EURUSD