The risk rally has further legs to go benefiting higher-yielding FX in particular, argues Morgan Stanley in its weekly FX note to clients today.
"Fed Minutes suggest the central bank is in no hurry to hike rates and with ‘now-cast’ GDP indicators rebounding, markets seem to enter a sweet spot allowing equities to recover. Ahead of next week’s G20 meeting in Shanghai, China may consider additional measures to support its economy and rising material prices, like copper, leave the impression that demand has recovered from depressed December levels.
A Fed on hold, rising commodity prices, and stability in the data suggest trading the USD from two sides: long against the traditional funders, but short against high carry currencies," MS advises.
EUR downside risks on the rise.
"The profitability of this position may well exceed our original expectations as EUR downside risks have increased. Rising bank funding costs may increase balance sheet consolidation pressures, tightening credit standards. Hence, there is more heavy lifting to be done by the ECB.
EUR has maintained an inverse relationship with risk appetite in the latest risk rally but this correlation may start to ease. Eurozone credit concerns could break EUR’s inverse relationship like it did in 2008 and 2011. The GCC final ruling on OMT and the potential German plan to impose haircuts on holders of EMU debt could further this dynamic," MS notes
"Though we are tactically bullish on risk as outlined last week, we remain medium term bearish," MS argues.
In its strategic portfolio, MS maintains a short EUR/USD position from 1.1360, with a revised profit-stop at 1.1210, and a target at 1.07.
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