Morgan Stanley's 'FX Pulse' is a long and detailed weekly piece 9every week!).
This week they discuss what to watch for in an equity market decline impacting on forex, also how oil price decline is impacting currencies.
Turning to their specific currency views, this on euro:
Waiting for the Dip to Buy
Neutral
- Watch: PMI, German Ifo, M3, CPI
- We see room for further correction in EUR as long positioning remains heavy and rising US real yields provide temporary support for the USD. However, we remain bullish on EUR in the medium term and like buying EUR dips.
- EMU officials continue to show more signs of integration efforts, with German FinMin Schäuble suggesting that Merkel and Macron are ready for changes to the EU Treaty.
- Stronger global and EMU growth should also fuel a continuation of FX-unhedged equity inflows into the Eurozone, strengthening the EUR.
MS also include EUR in their 'Strategic FX Portfolio Trade Recommendations'
They have a limit order sitting in place (from May 18): Entry: 1.1030; Target: 1.1800; Stop: 1.0800
Their rationale, in brief:
- We expect the USD to rally modestly against EUR as the market reprices its Fed expectations. We would use that rally in the USD to sell vs the EUR.
- Increased signs of pro-integration pressures emerging in Europe (eg. Macron, Portugal - Fitch upgraded outlook from stable to positive ... improvement in the periphery)
- Stronger growth environment should bring inflows into the equity market.The risk to this trade is a slowdown in equity market
