ECB President Draghi successfully batted down the EUR by stating (a) policy needs to be re-examined in December and (b) further deposit rate cuts are firmly on the table, notes Morgan Stanley.
“While the EUR is not an explicit policy target, the central bank more than recognizes its importance to achieving its mandate. The Bank has learned from the difference in the EUR’s 2014 versus 2015 experience that rate cuts, as opposed to QE, have the biggest effect on EUR. Of course a combination of policy tools is the most powerful way to get rates lower across the curve and would have the biggest negative impact on EUR,” MS adds.
“We elect not to challenge this shift with EUR longs, but we still think the broad USD TWI has downside near-term. The fundamental reasons for our USD correction call are still intact, namely (1) China’s cyclical stabilization, (2) contained outflows from China and (3) subdued US growth and inflation that will keep the Fed cautious,” MS argues.
“Next week’s US FOMC, GDP, core PCE and ECI data are unlikely to drive Fed expectations materially more hawkish. Upside surprises, especially in the wage data, present the key risks to our near-term USD view.
Still, over the medium term, we maintain our structural concerns on EM. Our preference is to be selective in long EM positions that focus on relative value,” MS adds.
Looking forward, MS expect EUR/USD to remain within a 1.08 to 1.15 range in the near-term.
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