Sell EUR/USD this Week Say Morgan Stanley (And so Far, it's a Good Call)
Analysts at Morgan Stanley are advocating the Euro/Dollar exchange rate be sold this week.
In a strategy note to clients Morgan Stanley argue the Dollar has room to recover as the market still only appears to be pricing two rate rather than three hikes by the Fed, especially after the lack of wage growth in the most recent Payroll’s report.
“We still expect the USD to appreciate, with the market appearing to underprice the Fed for this year,” said Morgan Stanley’s FX strategist Hans Redeker.
Redeker dismisses the argument put by Euro-bulls that better economic data released recently could make the European Central Bank (ECB) start to taper – or reduce – its quantitative easing (QE) programme.
German data has been particularly strong but this has been offset by increasing risks stemming from the periphery, especially Italy where yields have been rising.
Redeker thinks the ECB will want to keep monetary policy accommodative to help support the weakest in the Eurozone rather than tightening it to support the strongest so we should look to Italy as a guide for future ECB monetary policy not Germany.
New regulations limiting the amount of sovereign debt banks may hold also favours continually loose policy from the ECB, and therefore Euro-weakness.
The regulation would mean many Italian banks would have to sell BTPs – or Italian government bonds – and if the ECB were to simultaneously reduce its bond purchases, that could cause an unwanted spike in yields and ‘unwanted’ volatility – the opposite of the ECB’s mandate.
Overall, therefore, Morgan Stanley see the path of least resistance as down, and the only main risk of them being wrong as due to increased anti-Dollar rhetoric from Trump and his advocates.
They recommend selling the EUR/USD pair at current market prices, to a target at 0.9900, with a stop at 1.0850.
A Good Call as EUR/USD Slumps - But on French Election Risk Premia
At the time of writing the Euro is down by nearly 0.7% on the day against the US Dollar suggesting that those who took Morgan Stanley's advice will be sitting pretty.
However, the reason for the falls are not quite in line with the views set out by strategists at the investment bank.
Consensus on Tuesday February 7 is that the Euro is struggling owing to rising risk premia on the Euro arising from French election risks.
"The safe-haven plays are once more in demand, gaining ground as politics again looks to play a key role in market moves. With concern over political risk in the Eurozone rising, surrounding the French Presidential election, the yields on French OATs have pulled sharply higher. This is putting pressure on the Euro which is beginning to weaken against the US Dollar," says Richard Perry, an analyst at Hantec Markets in London.
French far-right leader Marine Le Pen and independent centrist Emmanuel Macron are set to make it through to the presidential election's second round in May, according to an opinion poll published on Monday, with Macron comfortably winning the runoff.
The IFOP rolling poll of voting intentions showed Le Pen garnering 25.5% of the vote in the April 23 first round, up 1.5% since February 1, while Macron would get 20.5%, up 0.5% over the same period.
Conservative candidate Francois Fillon placed at 18.5%, down from 21%.
Socialist candidate Benoit Hamon has lost momentum since his nomination in a primary vote, and was now seen gathering 15.5% of the votes, down from 18 percent on February 1.
