Central Banks

A euro slump on the ECB is a buying opportunity – Morgan Stanley

Morgan Stanley on the ECB decision

Morgan Stanley thinks the ECB may be more focused on steepening the yield curve that easing lending conditions.

If so, that argues for less QE and more rate cuts. That’s a scenario that could lead to short-term euro selling as it’s used to fund carry trades.

This weakness would be short-lived in our view, and would be an attractive entry point for EUR longs. The more EUR is used as a funding currency, the more it is likely to rally should a risk shock lead to carry trade unwinds. We think any risk rally in the coming weeks is tactical and unlikely to last long, so this unwind seems likely to us.

Perhaps more importantly, there is a risk that Lagarde draws a harder line with policymakers and says that it’s time that they step up and deliver stimulus — something that could lift the eurozone economy and the euro.

On a trade of the week, MS recommends buying AUD/USD at 0.6800 (spot 0.6868) with a target of 0.7200 and a stop at 0.6665.

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