A Morgan Stanley research note titled: Reasons to Be EUR Bearish
It says:
- The major support pillars for the EUR have started to crumble.
Gives the reasons for EUR weakness.
- EUR is exposed as European assets look less attractive to foreigners on a risk-reward basis.
- Peripheral yields now being driven lower by domestic flows, crowding out foreign investors
- Three types of flows into Europe are slowing, in our view: (1) private-sector purchases of peripheral bonds, (2) private-sector purchases of equities (equity market underperformance), and (3) reserve diversification into EUR (Central bank reallocation flows slowing)
- There is also potential for increased FX hedging of existing European assets held by foreigners (increasing currency hedging as EUR risks rise ) – another EUR negative.
And concludes:
- We think short EUR is the G10 trade for the next 12 months.
- We have been recommending short EUR positions since May
- Believe that EURUSD downside is now set to gain momentum as portfolio flows into the Eurozone slow
- We reiterate our forecast for EURUSD at 1.31 by year and at 1.24 by mid-2015.