Comments from Morgan Stanley's Global Currency Research Team:
- Grexit risks have receded markedly
- But the tense and drawn-out public debate between Greece and its creditors will have a lasting impact on EUR
After previously vehemently defending the irrevocability of the Euro, policy makers have stepped back from such ardent assertions. Notably at the last ECB press conference, President Draghi commented that "it's not up to the ECB to decide who's a member". Post-Greek negotiations, the euro area appears more rather than less fragmented, with many now accepting the possibility of a country exiting at some point. As such, we believe that markets are likely to assign a higher risk premium to European assets, taking into account a redenomination risk that previously seemed much less likely.
- Uncertainty is likely to keep the ECB on autopilot for the foreseeable future
- Front end yield differentials between Europe and the US ... should continue to widen ... keeping the pressure on EURUSD to the downside.
