Euro is Forecast Higher by Credit Agricole, Morgan Stanley, Scotiabank

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Institutional analysts continue to turn constructive on the prospects facing the euro - here are some of the latest views.

Recent 'squaring' of 'euro shorts' has seen the euro bought as traders realised the currency remains stubborn to further falls thanks to the ECB's unwillingness - or inability - to prompt further weakness. 

As we note here, an ineffective ECB is one reason why JP Morgan are forecasting a higher Euro against both the Dollar and Pound over coming months.

The process of position 'squaring’ involves foreign exchange dealers in hedging their net long or short positions so there is no risk of loss.

According to Credit Agricole most positions are now ‘squared’ meaning there is not likely to be any more euro buying purely for the purpose of position squaring.

Nevertheless, they do see continued support for the euro as they forecast PMI data likely to come in above expectations this week; this giving euro-traders another reason to buy the single currency.

“This in turn suggests it will be about external factors to drive the currency. This is especially true as this week’s preliminary September PMI releases are likely to confirm moderately expanding business activity. This in turn remains fully in line with the ECB’s base case,” say Credit Agricole in a research note, provided to us by institutional research providers eFXNews.

Analysts at Morgan Stanley are also remaining “Bullish” on the euro stating the inability of hamstrung Eurozone banks to recycle money from the region’s large current account surplus as the main reason.

The banks cannot lend the money back out of the Eurozone because their balance sheets are already so overweight with non-performing loans that they daren’t add more.

As such there is a net inflow of euros into the Eurozone.

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Scotiabank, meanwhile, have noted how euro traders in derivative markets – that is trading futures and options – have been closing their ‘short’ positions (positions which make money out of the euro falling) at a record pace.

This suggests a major switch in sentiment in favour of the euro.

“EUR saw the greatest w/w change, its net short narrowing $1.6bn to $11.4bn as a result of a paring in risk. In contract terms, the 16.7K decline in gross EUR shorts was the largest w/w drop since early January.”

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On the contrary sentiment appears to be souring for the Canadian dollar.

Scotia noted how, “net long positons softened,” and highlighted the 0.3bn decline in longs to a 1.3bn net position.

Morgan Stanley are also bearish the Canadian dollar, basing their stance on recent negative commentary from the bank of Canada, which raised concerns about inflation being too low for the first time in a long time.

“We remain bearish on CAD, with the latest change in the BoC's stance adding support to our view. In its latest meeting, the BoC stated that inflation risks have tilted somewhat to the downside and growth may be somewhat lower than anticipated in July, softening the hawkish tone that it had been adopting so far despite weak economic data. This increases the possibility of the BoC cutting rates this year, especially since we are skeptical that exports can rebound enough in the second half of the year for the BoC to hit its forecasts,” said the investment bank in a recent forecast.

Coming full circle again, we note Credit Agrcole highlight EUR/CAD as a buy, given the positive outlook for the former in the pair and the negative for the latter:

“In particular when it comes to risk sentiment we see scope of further deteriorating conditions. Such prospects should come to the benefit of crosses such as EUR/CAD. We remain long the pair.” Stated the bank.

Adding the following trading recommendations:

“Credit Agricole maintains a long (buy) EUR/CAD position from 1.4710 targeting 1.54.”

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