Nilaish Kumar
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EUR Bear Market In The Waiting; Sell Rallies

Morgan Stanley's call for the USD correction into the end of last week may have come slightly too early, as a strong US payrolls print combined with heightened political uncertainty offered support to the currency over the past week.

However, as the USD corrects, MS still thinks that risks are once again skewed towards a weaker EUR, as the EUR bear market is currently in the waiting.

Greece Risks:

"Uncertainty remains in Greece, where though there have been some signs towards de-escalation, no official agreement has yet been reached. Concerns about Greek banks’ ability to fund remain as well, which should keep a risk premia priced into EUR," MS argues.

Cross Border Flows:

"Cross border financial flows within the Eurozone are likely to suffer. Fragmentation is a reality, which could make it difficult for peripheral banks to access funding from other Euro Area countries. Instead, banks are likely to focus on opportunities, keeping the EUR under constant selling pressure," MS argues.

Only A Matter Of Time:

"With respect to EURUSD, markets seem to be in the middle of a ‘rolling correction’. While leveraged accounts seem to be taking off some EUR short positions, EMU financial intermediaries and real money accounts continue to buy FX denominated assets. Against this background, it seems only a question of time before the EUR breaks lower once again," MS projects.

Sell Rallies:

"Economic data have been somewhat more robust, but we would use any rallies in EUR on strong data as a selling opportunity," MS advises.