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Morgan Stanley Slashes EURUSD Target To 1.30, Says EUR Attraction As An Alternative Reserve Currency Ending

Tyler Durden's picture




 

While Goldman continues to resolutely predict that the EURUSD will any minute now go back to 1.50 (and 1.55 in 12 months or so), Morgan Stanley has for once decided not to ape its far more capable and client "fornicating" competitor Goldman and has thrown up all over the EUR, slashing its EURUSD forecast "significantly lower"  to 1.30 by year-end and 1.25 in Q1 2012, before stabilizing in the second half of next year because the now second rate bank believes that "economic, political, constitutional and monetary policy developments in Europe have now become more challenging for the EUR, while international support is likely to decline." Its conclusion: "As a result, the EUR's attraction as an alternative reserve currency is likely to be reduced." So, let's do the math: EUR: not a reserve currency? Check.  CHF: not a reserve currency? Check (and pegged to the former). USD: about to be gang banged by the windowless corner office at the Marriner Eccles building housing America's central planners? Check. So.... what is left if one is looking for a reserve currency?

From MS:

We have revised our EUR forecast significantly lower, and we now expect EURUSD to decline to 1.30 by year-end and 1.25 in Q1 2012, before stabilizing in the second half of next year. We have also taken our forecast for the EUR crosses lower in most cases. Indeed, we believe that economic, political, constitutional and monetary policy developments in Europe have now become more challenging for the EUR, while international support is likely to decline.

Within Europe, we view recent developments as highly significant for the EUR. The less hawkish tone of the ECB, the resignation of Stark from the ECB Executive Board and the German Constitutional Court ruling all add to the already deteriorating economic and fundamental picture in Europe in our view, pointing towards a weaker EUR.

Following the more dovish tone of the ECB at last Thursday's press conference and the resignation of ECB member Stark (Stark was seen as the most hawkish member of the ECB) we expect the EUR will become more exposed to negative events and data as market rate expectations will likely adjust more readily. Indeed, traditional interest rate and yield models are now suggesting that EURUSD is set to move sharply lower (our relative EU-US yield curve model is generating negative EURUSD signals).

The ECB bond purchases are also leading to an expansion of the ECB's balance sheet, which will undermine support for the EUR, especially given that the Fed’s balance sheet has now stabilized. As a result, the EUR's attraction as an alternative reserve currency is likely to be reduced.

Moreover, while the fundamental picture for the EUR has deteriorated, internationally supportive flows, which provided the EUR with protection from negative news over recent months, appear to have started to decline. The EUR has been one of the major beneficiaries for Central Banks’ FX reserve diversification programmes. However, evidence of a global slowdown suggests that the pace at which central banks accumulate reserves will slow.

Indeed, FX reserve accumulation is closely correlated to global growth and trade. In the case of China, the acceleration in the pace of CNY appreciation is another factor pointing towards a slowing of currency reserve accumulation. This implies that central bank reserve diversification will also slow, resulting in a reduction of EUR buying from this source.

We expect the anticipation of a global slowdown will have a broader impact on currency markets over the remainder of the year and the beginning of 2012, which will put the pro-cyclical and commodity currencies under pressure more generally, before stabilizing in the second half of 2012. We forecast the AUD to undergo a more significant setback to 0.99 against the USD for year-end with a further decline to 0.95 in Q1 2012, from where a gradual recovery would be anticipated.

GBP is expected to feel the effects of the global slowdown, especially if this is accompanied by a more challenging global investment environment. Hence, we have revised our GBPUSD forecast lower to 1.53 for year-end and 1.51 for Q1 2012. The economic picture in the UK is also deteriorating rapidly with the BoE appearing to be shifting more towards the dovish side. Indeed, the QE discussion in the UK is gaining momentum. There is also evidence that safe haven flows into the UK Gilt market have declined, reducing support for GBP.

As far as the CHF is concerned we expect the SNB to maintain the 1.20 EURCHF floor through to the end of the year, but believe the risk is for this to give way early next year as the broader downward pressure on the EUR builds.

Overall, we expect the USD to regain ground. A lack of safe haven and alternative reserve currencies suggest that the USD will move, at least temporarily, back into favour. Hence, a moderate recovery for the USD is now projected with the MS Dollar Index (MSDI) forecast to rise by 2.4% going into the year end and 4.4% by 1Q 2012.

 

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Tue, 09/13/2011 - 11:45 | 1663861 Ethics Gradient
Ethics Gradient's picture

Gold, bitchez!

Tue, 09/13/2011 - 11:51 | 1663897 Titus
Titus's picture

Silver cocksuckers! 

Cocksuckers seems more appropriate than following "bitches" with "bitches".

Tue, 09/13/2011 - 12:29 | 1664038 Silver Bully
Silver Bully's picture

'Bitchez' bitches!

It had to be done.

Tue, 09/13/2011 - 11:46 | 1663869 oogs66
oogs66's picture

buy buy buy

Tue, 09/13/2011 - 11:49 | 1663882 TradingJoe
TradingJoe's picture

"if you have to forecast, forecast often" :)))

Tue, 09/13/2011 - 11:49 | 1663886 spiral_eyes
spiral_eyes's picture

Here's the real reserve currency:

Gold.

 http://azizonomics.com/2011/09/10/can-bernanke-print-gold/

Tue, 09/13/2011 - 12:57 | 1664160 Spitzer
Spitzer's picture

The ECB just has to bid for gold with their dollars and Bretton Woods 2 is done.

Tue, 09/13/2011 - 11:50 | 1663890 Dick Darlington
Dick Darlington's picture

Fitch, the sleepy bear, is waking up. Expecting Saturnus sovereign wealth fund to express CONfidence in Spain and say they will buy all the paper they can get.

Tue, 09/13/2011 - 11:50 | 1663892 DefiantSurf
DefiantSurf's picture

Shocking revelation from Morgan Stanley, be still my beating heart...EURO as a reserve currency? That was a joke 2yrs ago...

Tue, 09/13/2011 - 11:50 | 1663893 orca
orca's picture

SGD as a CNY proxy, RUB as a commodity proxy, and lots and lots of the rich man's silver in physical form, hedged by ponzifiat.

Tue, 09/13/2011 - 11:56 | 1663898 SheepDog-One
SheepDog-One's picture

Why in the hell is the Euro 1.30-1 USD anyway....is there any plausible reason why that should be at all at this point?

Tue, 09/13/2011 - 19:02 | 1665569 Rainman
Rainman's picture

Euro has had only 12 years to debase itself. Patience.

Tue, 09/13/2011 - 11:55 | 1663913 SheepDog-One
SheepDog-One's picture

'Reserve currency of favor'....LOL what a joke theyre all nothing but drunken fiat hobos staggering arm in arm down an alleyway signing pub songs of 'hope for tomorrow...tomorrow'

Tue, 09/13/2011 - 12:32 | 1664052 Silver Bully
Silver Bully's picture

fiat hobo with a shotgun!

Starring The Bernank!

Tue, 09/13/2011 - 11:55 | 1663915 TheLooza
TheLooza's picture

" So.... what is left if one is looking for a reserve currency?"

the Polish Zloty, obviously.


Tue, 09/13/2011 - 11:57 | 1663923 SheepDog-One
SheepDog-One's picture

Shells and beads would be better reserve currencies than any of these fiatsco jokes.

Tue, 09/13/2011 - 12:04 | 1663952 mayhem_korner
mayhem_korner's picture

Shells are a good reserve currency.  I'm partial to 8-shot meeself.  ;)

Tue, 09/13/2011 - 11:57 | 1663919 tickhound
tickhound's picture

The Canadian $, check.  The Aussie $, check.  The Euro/Swissie, pending...

'Par' with the US $ seems to be a real good score.  Always coincidental, never by design.  Gold traded in $ Dronks.

 

Tue, 09/13/2011 - 11:59 | 1663931 monopoly
monopoly's picture

We all know this is taking more time than we feel is needed, but that is the way it is. Miners still in correction mode. Patience and physical gold, silver are good.

Tue, 09/13/2011 - 12:08 | 1663970 monopoly
monopoly's picture

Ya know, BBY one of the best retailers out there. So, if their sales are collapsing, do you really want to be in any retail? Stock down almost 8% and 50% off of long term high. Same with banks, why would anyone try a trade in an industry where you have no idea what the truth is and they cook their books to make all look better when most are insolvent if the truth be known.  Makes 0 sense to me.

But not shorting this market.

Tue, 09/13/2011 - 12:12 | 1663984 SDRII
SDRII's picture

the solution is always dilution

Tue, 09/13/2011 - 12:16 | 1663996 youngman
youngman's picture

"Another one bites the dust...and another ones gone..another ones gone..another one bites the dust..."  Queen.......so that leaves the USD and PM´s.......hmmmmmmmm...easy choice for me....but not for the HFT´s

Tue, 09/13/2011 - 12:20 | 1664006 ziggy59
ziggy59's picture

ooooh...oooohh  Mr. Kotter...i know this one.....pick me...pick me...

 

The Yen.  muwahahahah

Tue, 09/13/2011 - 12:53 | 1664139 hungarianboy
hungarianboy's picture

Gold will go to $1500 per ounce. Just wait and see.

Tue, 09/13/2011 - 13:04 | 1664185 xtop23
xtop23's picture

What will the DJIA be at your $1500 projection?

Tue, 09/13/2011 - 13:35 | 1664357 hungarianboy
hungarianboy's picture

Who cares about the DJIA? It's about the S&P and Russel2000.

But down to.

Tue, 09/13/2011 - 13:47 | 1664404 xtop23
xtop23's picture

 Only cared about the number of the DJIA as it pertains to Au to compare to previous markets and their numerical relationships , not whether or not its more or less valuable than the S&P in determining relative values. Which it isn't.

Tue, 09/13/2011 - 13:41 | 1664381 LowProfile
LowProfile's picture

I'm betting $1300/6000

Then to infinity, and beyond

Tue, 09/13/2011 - 13:05 | 1664170 xtop23
xtop23's picture

What is the deal with Morgan-Stanley lately ? They've been releasing decent information ( although hardly surprising information and the reserve currency comment is laughable ) .

Drumming up business ? Need to attract some customers that have some actual intelligence since the stupid fish were already taken down or have pulled out of this bipolar algo induced Hell of a market ?

Of course if they had intelligence they'd do their own investments and eliminate the middle man .

Tue, 09/13/2011 - 15:26 | 1664880 Budd Fox
Budd Fox's picture

Australian and New Zealand dollar...but none of us wants to be nobody's reserve currency . Keep us out of the mess...please.

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moxia19's picture

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