"We remain bearish on EUR for two main reasons. First,
low returns on assets with EMU may cause local funds to export their
portfolio investments abroad into higher-yielding destinations. Second, as foreign entities continue to use EUR for funding purposes, the common currency should remain weak," MS projects.
"We find that EUR is now in a similar position to the one that
USD was in between 2009 and 2012, when USD was used for funding purposes
globally," MS adds.
Longer than expected correction.
"We had assumed a correction starting in March citing i) inflated
market expectations concerning the path of Fed rate hikes and ii) the
European equity market correction generating EUR support via EUR funded
carry positions and hedging activity - however, the persistence of this
correction has taken us by surprise," MS argues.
Same framework
"However, we have not changed the framework in which we see FX
markets operating in the medium term. Growth differentials will remain
USD supportive, not due to the US doing particularly well, but due to economic conditions in the rest of the world staying fragile," MS adds.
New forecasts:
MS now targets EUR/USD at 1.08 in Q3, 1.05 in Q4, and 1.00 in Q2 '16
