The gameplan from Morgan Stanley
From MS:
We stick to our trading strategy of using the current rebound to sell current account deficit and liability burdened currencies against the JPY, USD and the EUR.
Our EUR constructive stance may surprise as we have been known for long as EUR bears. Indeed, there has been little change concerning our long-term EUR bearish view.
There are enough upcoming event risks with the potential to lastingly increase EUR risk premia including Italy's October referendum concerning the crucial Senate reform or the French Presidential election in April/May. Should one of these events 'go wrong' then the EUR may come under significant selling pressure as investors liquidate long-term EUR denominated assets fearing a break-up of the EU. However, these risk events have been well flagged and European authorities are aware of their dangers. In this context we need to watch how Italy manages the recapitalisation of its banks
EUR = JPY for now.
The point we make is that EMU is using an increasing share of national savings currently generated by economic restructuring for domestic purposes instead of exporting these savings into higher yielding non-EUR denominated assets. Hence, the EUR stays supported due to the lack of long-term capital outflows.
Italy's plan for a debt funded bank equity injection reminds us how - 20 years ago - Japan invested its savings into ever lower returning domestic assets instead of channelling funds into higher yielding foreign assets. Should Italy succeed with its debt funding bank recapitalisation plan then the EUR will rise, EUR denominated returns will fall further undermining long-term prospects for equity markets.
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