Euro/yen has rocked on risk on/risk off sentiment. And now, the team at Morgan Stanley sees a big break lower from here.
Here are 4 reasons for this:
Here is their view, courtesy of eFXnews:
Morgan Stanley stays very convinced that EUR/JPY is set to break lower from here.
“There are a number of reasons why bearish EUR/JPY positions offer an excellent risk/reward,” MS advises.
First is related to Greece: “JPY-based investors have significant EMU bond exposure. The Greek deal seems to have low international confidence levels, suggesting foreign investors including Japan may withdraw funds from EMU bond markets. Peripheral risk premiums would rise in this scenario, which doesn’t bode well for the EUR,” MS argues.
Second is related to the ECB: “With Greece hanging on, but staying vulnerable leaving Grexit an option, the ECB has little choice other than to run very expansionary policies,” MS adds.
Third, is related to EMU-based funds: “EMU-based faunds. including banks will find it difficult to generate adequate domestic returns within a non-optimal currency union. In this scenario, core EMU-based funds will reduce their peripheral exposure. Capital markets will get fragmented and less efficient. Core funds will export investment into non-EUR jurisdictions. The result is for the EUR to decline,” MS clarifies.
Fourth, is related to the Fed: “Fed hiking rates has the potential to weaken risk appetite should higher US rates kick in when US corporate profitability has peaked,” MS argues.
All in all, MS is looking to add risk negative positions to its FX portfolio.
“Bullish JPY and, to a lesser degree, the CHF and the USD fall into this category. Needless to say, in this case EURJPY would fall hard,” MS advises.
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