Morgan Stanley's monthly currency outlook sees them continue with a negative outlook on the euro:
- We have maintained our base case forecast for EUR/USD of 1.05 by year-end
- We believe that there is now an increased risk of moving towards our bear case projection of 0.90
MS cites:
- The impact of QE/negative rates
- The increasing use of EUR as a funding currency
- The ongoing risks regarding Greece
All of which "continue to provide a negative outlook for EUR"
They go on with more comments on Greece:
- Increasing risks regarding Greece, in particular the lack of progress in negotiating the terms of structural reform required for bailout funds to be released
- The risk of policy mistakes taking Greece closer to an exit from the eurozone has increased, in our opinion, although we still place the probability of a Greek exit at 25%
- However, there is now a greater risk of additional measures, such as capital controls, being required to keep Greece in the euro, we believe
- Taking these adjustments to the risk assessments, overall the probability of EUR/USD declining below our base case 1.05 forecast has increased, hence the renewed emphasis on our bear case projection for EUR
- At the time of writing, the Greek government is preparing details of the structural reform measures to present to the EU. If these are not accepted and bailout funds are not released, Greece's position is likely to become more perilous, leaving EUR increasingly vulnerable
The start of the ECB asset purchase program initially drove EUR/USD down to our year-end target of 1.05 by mid-March
- EUR has subsequently been able to benefit from the broader post-FOMC USD correction
- However, it is interesting to note that the EUR/USD rebound has been relatively moderate, given the extent of the decline seen over the past six months and the degree of position unwinding which appears to have taken place
- We believe that this is a function of the structural outflows from EUR which are continuing, while any investment inflows appear to be currency-hedged, which together are set to keep EUR under pressure
- Despite the EU-US yield spread moving higher, supporting the EUR/USD rebound, it is interesting to note that EMU yields continued to move lower, implying that the correction was being driven by the US side of the equation, with EUR indicators continuing to generate negative signals. Hence, the EUR downtrend is set to remain in place, in our view.