EURUSD pair is less exposed to rates differential theme influence at the moment, so probably it’s time to pay attention: what catalysts are affected to the fate. The interest rate difference defines short-term currency pair attraction, however consider that this difference is formed according to monetary policies of the respective central banks, it can be assumed that, a tactical point of view is: relative economics status influence on currency pairs.
Than what can boost EUR growth? Morgan Stanley analysts underlined 2 reasons: first of all, last year international investors reduced currency hedging ratio on equity instruments in Euro. That action made stronger pressure on currency. Also in last two month foreign exchange reserves diversification process was accelerated in favor of Euro.
EC publish data without separated portfolio liabilities between countries. Unless The Ministry of Finance provides more detailed statistics. This statistics shows Asian countries have been bought record quantity of short-term Japanese government bonds in the beginning of the year, that means diversification processes. Considering that heads of the biggest reserve funds also fix Euro share below the indicative in reserves, diversification is also expectable from that area.
This factors help Euro grows more than fundamental indexes warrant and complicate The European Central Bank fight with deflation. However such capital flows ain’t a long-term rule and as soon as this effect will start to reduce Euro according to Morgan Stanley analysts opinion again will oriented on the yield spread.
Euro is deprived of long-term stability
Lack of significant structural reforms that can open economic potential of Eurozone mix with ECB inability to support bank sector profitability point that currency union is destined Japanese fate in the end.
Does it means that Euro takes the Yen way and will get stronger for two decades?Morgan Stanley analysts don’t think so. When a deflation started in Japan, the country still could maintain previous level and way of life at the expense of profits that was generated by foreign assets and repatriable back to Japan. Yen growth was dictated to the side effects of those monetary flows. Meanwhile, Eurozone doesn’t have such pure long position in foreign assets. On the other hand Eurozone has pure outer responsibilities. That means as soon as financial sector of the region will adjust their balances to the regulators requirements Euro will turn up under the pressure of structure sales.
Morgan Stanley Euro/USD forecasts: 1.06 – on the end of the second quarter; 1.03 – on the end of the third quarter and 1.0 on the end of the fourth quarter.