Morgan Stanley Cuts EURUSD Forecast From 1.20 To 1.15 On Upcoming ECB Easing

Tyler Durden's picture

Stop us when this sounds familiar: 'While we expect central banks globally to continue to provide liquidity, it is the ECB’s position that has changed the most dramatically. The relative expansion of the ECB’s balance sheet is EUR bearish in our view....the liquidity being generated by the ECB is to a large extent absorbed by the bank refinancing process, hence the large deposits at the ECB. Although there is clear evidence that some of the funds have been used in the peripheral bonds markets, helping to stabilise sovereign yield spreads, lending into the real economy remains constrained. We believe that the relative performance of money multipliers will be a significant driving force for currency markets in the coming year. We see the ECB liquidity as a negative for the EUR" At this point the preceding should remind our readers, almost verbatim, of this Zero Hedge post from January 31, "Reverting back to our trusty key correlation of 2012, namely the comparison of the Fed and ECB balance sheet, it would mean that absent a proportional Fed response, the fair value of the EURUSD would collapse to a shocking 1.12 as the ECB's balance sheet following this LTRO would grow from €2.7 trillion to €3.7 trillion." And the reason why the latter extract should remind readers of the former is because it is the basis for the just released conclusion by Morgan Stanley cutting its EURUSD price target from 1.20 to 1.15.

MS' forecast chart on the pair:

As for the basis of our assessment, we used the following chart showing the relative and projected sizes of the ECB and Fed balance sheets as the basis of EURUSD correlations:

And here is the Morgan Stanley comp:

Some more on the MS thesis:

Expectations had been running high for progress to be made at the EU Summit, and while 25 EU members signed up to the fiscal compact, many elements were watered down,  especially with regards the regulation and enforcement of the agreement. Indeed, implementation of the fiscal compact is not expected until 2013 and will still require ratification at a national level. Implementation risks remain high, in our opinion. The ESM was also endorsed, but again many details still need to be finalised. While the EU Summit has been seen as a success on many levels and may well be viewed as going some way towards starting to address structural problems in the Eurozone, the immediate problems are far from solved. As a result, any EUR relief gains are expected to remain limited in our view. Indeed, some EU officials clearly do not believe that the agreement goes far enough. The EU’s Junker has commented that the measures are insufficient and that further steps will have to be taken at the next Summit in March, highlighting the lack of  centralised economic authority. We maintain our bearish EUR view, and have in fact lowered our EURUSD forecast for 2012 to 1.15, from 1.20 previously.


However, while the January EU Summit agreement may fall short of original expectations, the importance of the steps currently being made should not be under-estimated, in our view. The progress being made on the fiscal front could well provide the pre-conditions for further policy measures, which we believe will be effective in helping to address many of the more immediate issues in the Eurozone. But once again we would advise caution regarding the currency interpretation.


While perceived progress will likely provide support to peripheral bond markets and Europe asset markets, we still believe it will be a mistake to translate such developments into a bullish EUR view.


It is worth noting that peripheral bond spreads have stabilised and CDS spreads have also adjusted lower in many cases, resulting in a significant shift  higher in our measure of risk adjusted yields, which has historically been associated with a rebound in EURUD. The fact that the EUR has not been able to take advantage of the more supportive environment, as highlighted by the rise in risk adjusted yields, is further evidence supporting our view that  the fundamental picture for the EUR remains weak.

Needless to say, a collapse in the EURUSD will evoke an inevitable and violent response by the Fed, something we noted before, and something which MS also, wink wink, has realized:

...analyzing the impacts of QE1 and QE2 we made two observations. First, the market impact of QE2 was significantly smaller than that of QE1 and  second, QE2 developed a front loaded impact. We think markets have started pricing in QE3, suggesting upside potential following the formal announcement of QE 3 will be limited. Once QE3 begins, it may be time to implement currency trades that benefit from risk aversion.

It is our view, that once the EUR implodes, the Fed will have no choice but to intervene yet again, thereby sending the USD plunging and the EURUSD back to 1.50 or so, but everything in its course. Markets which have a tendency to frontrun everything, and which have now priced in the global central bank put in perpetuity may want to remember tha absent a 20% correction in either stock market monetization just ain't going to happen. Or rather, it will one way or another, only it will be far more violent.

Finally, now that MS openly disagrees with Goldman once again, it bears reminding that the last time Morgan Stanley was on the other side of the trade from Tom Stolper, MS was proven right in about 48 hours. It will be proven right one more time.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Uber Vandal's picture

This HAS to be Bullish, right?

I feel like playing that old Limbo song... How low can you go??

TruthInSunshine's picture

Merkel is being forced by Germans to not give in to that which would doom their standard of living (not to mention the other solvent, if few, EU Member States that she's meeting with tomorrow):   The temptation to debase the euro in a manner that would allow PIIGS+France to be able to pay down their debt in rapidly depreciating currency.

There will be fireworks in the EU all year long.

My only advice to the Germans would be to let their political leaders know that they want absolutely zero input from Geithner (and his cute little blonde lackey that he sent over there -Lael Brainard), Bernanke nor ObaMao, himself.

If you're trying to solve a crisis such as the one they face, the last thing you would want to do is heed the advice or listen to those who have their heads firmly implanted up their asses.

Take the pain now, Germany & northern EU, and swallow the medicine of less (debt-laden) economic interchange with the PIIGS+France, and build a deep firewall to protect your standard of living while you come up with a sound strategy for withdrawing yourself from what is now a clearly unsustainable large common-currency block.

If taking the medicine now causes some adverse side affects, but allows you to get back to solid health long term, you're so much further ahead.

trav7777's picture

German wealth is based upon repayment by all these deadbeat countries.

TruthInSunshine's picture

The counterpoint to that is Germany is conducting business, and holding reserves, in the same currency that necessarily has to be diluted by an amount that would make Bernanke blush to foster anything resembling a bailout of PIIGS (+ France) possible.

German bank deposits, pensions, retirement accounts, etc = all euro denominated.

Attempting to preserve their wealth and savings by allowing the main asset that such wealth and savings are based upon to be blowtorched would be quite idiotic of them.

Besides, Germany's real, true wealth lies in maintaining a highly skilled workforce and being able to produce world class products, that can be purchased by credit worthy, or better yet, cash buyers (or those trading valuable assets with Germany, such as oil).

Manthong's picture

Evidently called a month ago...


"It is very hard to conclude anything other than:


1- EURO BELOW 1.20: The Euro currency is exposed against most currencies and likely headed for a currency cross of less than 1.20 against the US dollar. A cross of 1.15 to 1.20 would not be a surprise. We have already seen technical 'death crosses', suggesting this is in the works as the Euro has broken below its 200 DMA in a downward trend channel."


Max Hunter's picture

German wealth is based upon repayment by all these deadbeat countries.

You are way off.. German wealth is based on the fact that they export more than they import, and do not allow that to change.. Like us dumb as Americans did..

Ghordius's picture

bullocks, German wealth is based on the German Women ;-)

He_Who Carried The Sun's picture

German wealth is based upon repayment by all these deadbeat countries.


Nope. You need to listen carefully to the news and use your brain for a change and how about learning to read a couple of languages? Merkel said in last April any "default" by anybody wouldn't do any harm by 2013. They just need another 11 months and then they will have it ALL written off....
The lower the EUR/USD the better for them.... ;-)

ACP's picture

Of course it's bullish. It just gives Madman Bernanke an excuse to expand the Fed's "other assets" a trillion or three.

TradingJoe's picture

Me like 20% "correction"!!!

jekyll island's picture

OK, stop.  SSDD.  

AC_Doctor's picture

Double dip depression coming and the printers whirr into action and the worth of holding physical precious metals starts to go mainstream!

Buck Johnson's picture

A double dip depression with a side order of hyperstaglation.  We are done as an economy both in Europe and the US.  When this thing implodes, it will take decades to fix it back and it won't be the same.

Stack Trace's picture

Maybe we can front-run the front-runners and buy PMS?

SDRII's picture

maybe they can coordinate with the Yen intervention call by GS. Can some just call time of death already

chump666's picture

The markets will be torn apart.

chump666's picture

On the premise that two major central banks, that are now out of control, go to war with each other ( massive currency devaluation).  The markets will collapse.  MS 1.15 is a little optimistic, once we know that the ECB is a MASSIVE liability to the FED and the world (staggering unrealized losses!).  The EUR should sink to parity.

And then we have our HFT momo machines.  That emulate human panicking x100000

2012 is the collapse year.  We may crawl to 2013, but barely.

Non Passaran's picture

That sounds familiar too.
It certainly doesn't seem that way this year either. This can go on for few more years, maybe even another 5-10 years.

Everybodys All American's picture

Excellent ... and now the Bernanke will pull the curtain up on his favorite QE forever gift to America. What an epic cluster mess is coming our way. What is also amazing is how Bernanke continues to get a pass on his utter failure by nearly everyone in the media and Congress. Of course when it all finally collapses we need to all act surprised because no one could have seen it coming.

1929agin's picture

Head/Shoulder formations with many indexes pointing to failure...

Oil is leading the failure lower..

Surely, the FED will save the day????



Uber Vandal's picture

Baltic Dry Index is leading the way, but you simply would not believe the spin about "it is an outdated metric due to the over abundance of ships that were built".

The Onion might actually live up to its slogan of America's Finest News Source. It is certainly more credible.

This is but one article about "not to panic" as those pesky deck chairs keep sliding toward the prow of the ship...

Robslob's picture



End Game = force majors to parity and then RESET BITCHEZ!


Followed by Gold Bitchez

Followed by Depression Bitchez

Followed by Hyperinflation Bitchez

Followed by Amergeddon Bitches


Wow...I feel so much better?

cranky-old-geezer's picture



... the liquidity being generated by the ECB is to a large extent absorbed by the bank refinancing process, hence the large deposits at the ECB. Although there is clear evidence that some of the funds have been used in the peripheral bonds markets, helping to stabilise sovereign yield spreads, lending into the real economy remains constrained.

Imagine that. Bailing out banks doesn't spur lending in the general economy. 

They finally figured it out after 3 years watching the same thing not help the economy in Ameirca.

The economy doesn't matter anymore.  Jobs don't matter either.

Keeping banks afloat is all that matters now.

John Law Lives's picture

"Imagine that. Bailing out banks doesn't spur lending in the general economy."

Banks may remain content not to take risk and lend when they can get near-free money and make easy returns buying fixed income.

The Great Chairsatan seems content to starve the middle class whilst helping out bankers.

Ned Zeppelin's picture

Correct. ZIRP benefits the banks, No one else. Wonder what the economy would look like if people earned a fair rate on their savings? But that is an old-fashioned way to think, according to this Fed, which only helps the few, elite, and mega-sized scumbag borrowers of money for speculative purposes - the "wealth extractors" -  since it temporarily juices asset values, thereby supporting the quasi-mark to market (really mark to model)  asset values the criminals are showing on their opaque balance sheets.

You gotta keep the Ponzi going, man.

LetThemEatRand's picture

Everyone.  Is.  Printing.

ZH predicted it.  

John Law Lives's picture

I suppose Japan, the ECB and the Fed will be striving to "out-ease" one another for a very long time.

Perpetual easing.

100% FUBAR.


Randall Cabot's picture

There was the tulip mania, the railway mania, the dotcom mania and now the inkjet mania.

It should send US equities to the Bernanke's comfort zone around S&P 900s so QE3 will be welcomed.

Cole Younger's picture

QE3 is a done deal to offset the ECB print factory. If the ECB prints and the fed doesn't, U.S. exports to Eurppe dry up.

Debeachesand Jerseyshores's picture

But also Brent will certainly fall below WTI and both will fall giving consumers in America and Europe a "tax cut" in disguise.

snowlywhite's picture

you're rushing; like always...


there's still a while till ltro #2. No point in front running; you'll just sweat needlessly. The market was, is and will keep on being dumb(or I wouldn't make money); so, be patient. It'll sink; but in it's due course.

ultimate warrior's picture

Matt Foley predicts You're gonna end up eating a steady diet of government cheese, and living in a van down by the river!

zorba THE GREEK's picture

When the Euro tanks, it will be one last buying opportunity for PMs

before the Fed reacts and sends PMs to the moon.

zerotohero's picture

This is going to make a vente at Starbucks unafordable.

Burr's 2nd Shot's picture

I'm sure the Japanese will want to get in on this race to the bottom.

"I wouldn't mind your hanging, boys, but you wait in jail so long"

Ned Zeppelin's picture

Thes guys are like Goldman - tell the clients one thing and buy the other via the prop desk.  No way the Euro slides to 115 - Greeece will be gone soon and the Euro will then go higher.

kito's picture

we are in a bit of a quandry....each snake is hissing to a different saying one thing, ms saying the opposite..both are never to be trusted....what to do??????????????


and i really hate when tyler uses these banks to back his point. hes giving them credibility where none is deserved...........

devo's picture

What did I say months ago? 1:1



Atomizer's picture



Bank of International Settlements:

Financial Stability and Sovereign Debt Sustainability: Policy Challenges from the New Trilemma”. 

Economics 115: The Trilemma - 2009 

For example, suppose the Fed was fixing the Dollar to the Euro at 1 dollar per Euro. In other words, you could bring a $20 dollar bill to the San Francisco Fedand they would give you 20 Euros (and vice-versa). Now suppose the interest rateon bonds here is 5%, and in Europe is 10%. Then if I am an investor with $100worth of U.S. bonds, I can have $105 dollars in a year by leaving my money in the U.S (100 *(1 + 0:05) = 105). Alternatively, I can take my $100 dollars to theFed and exchange them for 100 Euros. I can then invest these Euros in European bonds and have 110 Euros at the end of the year. After converting these Euros back to dollars at the fixed exchange rate, I will have $110 dollars - five dollars more than if I had invested in U.S. bonds. Thus investors will sell U.S. bonds in order to buy European bonds. As the supply of U.S. bonds that people want to sell rises, their price will fall. Recall that the price and yield (interest rate) on a bond are inversely related. Hence as investors sell U.S. bonds the yield on U.S. bonds will rise above 5%. When will the yield stop rising? It will stop rising when there is no longer an arbitrage opportunity,in other words when the yield on U.S. bonds equals the yield on foreign bonds.

chump666's picture

Thats the game the FED is playing the ECB whilst Mario buys up bonds left, right and centre.  I would say that the USD swaps to the ECB is the biggest money print a central bank has done with another central bank.  Both central banks are puump priming the EZ bond markets.  The problem?  EZ goes into a harsh recession with Greece and Italy going into a greater depression.  Bond holders will get wiped.  EZ banks dump more, the ECB buys and the FED prints to the ECB.  It will be the ECB holding HUGE unrealized losses.


tony bonn's picture

any time ms has anything to say it is a pms moment...its opinion about matter i would expect to see in the society gossip column just underneath the latest whisperings about kim kardashian....

yogibear's picture

The PIIGS  are going to take Merkel and Sarkozy for a ride to the end of the road and off the cliff.

The US has it's own issues with more people joining the food stamp plan. California and Illinois keep on trying to extend and Pretent while budget deficits balloon. 



hungarianboy's picture

Well with the NFP coming out the EURUSD shorts set by ZH as anti stolper trade will get smoked.

I believe you guys went short about a 100 pips lower :-) See you guys in the 1.3600 oh and above 1.3200 today :-)

atomic180's picture

The Northern European anti-inflation alliance led by Germany is forming.