Morgan Stanley sees limited downside in euro/dollar
Foreign exchange markets have been showing an increased sensitivity to central banks’ policies relative to one another, according to Morgan Stanley’s FX Drivers model.
“EUR/USD stands out as driven by policy, with the ECB-Fed divergence pointing lower for the pair,” the broker’s Global Currency Research Team said in a statement.
However, other factors – such as the global risk environment and commodity market performance – also needed to be taken into account when trying to identify specific opportunities and risks in FX markets, the investment bank said.
Even in the case of the euro/dollar currency pair, a more challenging risk environment and greater asset market volatility could limit the downside.
“We are cautiously bearish EUR/USD as our targets are approached.”
Morgan Stanley’s prediction was for EUR/USD to drop to 1.06 at the end of third quarter of 2015 and to 1.01 by the end of the third quarter of 2016.
Cable was seen at 1.53 and 1.48 at the end of each of those time frames, respectively.
Within the commodity space, the Canadian dollar was expected to come under added pressure, falling to 1.44 versus the greenback by the end of September 2016.
The Brazilian real and Russian rouble, on the other hand, were expected to gain and reach 3.95 and 72.0, respectively.
“In places where domestic income is being supported as a result of currency weakness, some future relative currency resilience could be seen.”
The rebound in the Australian dollar was seen as only “temporary” , with AUD/USD seen weakening to 0.66 from 0.70.
Lastly, Morgan Stanley said emerging market currencies “should stay under pressure” given the dearth of capital flows towards those regions.