Morgan Stanley comes top with restrained dollar view

Morgan Stanley topped last week’s one-month currency forecast charts by predicting the weather-beaten dollar will concede more ground to the euro and the yen in the short run, despite the bank’s bullish medium-term view on it.

On April 4, 2014, the bank forecast EUR/USD to rise to 1.3883 from around 1.37, and it saw USD/JPY slide to 102.45 from 103.89. The consensus view called for EUR/USD to remain in the 1.37 region and USD/JPY to rise to 104.10.

Ian Stannard, head of European foreign exchange strategy at Morgan Stanley, says the dollar’s lacklustre performance was due to the bad US winter and he remains bullish on its medium-term prospects.

“We think the data from the US is going to pick up and we’ll see recovery regain momentum after a weak first quarter, which we believe was weather related,” he says.

The extent of the dollar’s gains will be partly determined by whether the European Central Bank (ECB) eases monetary conditions further and weakens the euro.

The euro has been well supported by strong data from peripheral economies in the region, and while ECB president Mario Draghi has repeatedly voiced concerns about its strength, the central bank has yet to take action to curb the euro.

“One of the key drivers has been the performance of the peripheral assets markets. Data from countries such as Italy or Spain continues to come in strong, providing support to the asset markets and, in turn, to the euro,” Stannard says.

Without action from the ECB, he thinks the pair could continue to trade in the current 1.39–1.40 area, but Draghi’s latest comments suggest imminent steps that could drive the single currency lower. Stannard sees the pair trading at 1.39 in a month’s time while his three-month view puts EUR/USD at 1.40.

“We believe the ECB is more likely to act via interest rates rather than quantitative easing. We are looking for an interest rate cut and even a move to negative deposit rates,” Stannard says.

Meanwhile, the yen is set to trade sideways following minor gains against the dollar on the back of stronger-than-expected data. 

“We would be surprised if USD/JPY comes under further pressure in the coming months,” Stannard adds. “Although we believe that at some point the BoJ will probably have to do more to achieve its inflation target, at the moment it seems comfortable with current developments as far as the recovery seems to be developing in Japan. The BoJ seems to be taking a wait-and-see attitude and there isn’t anything to trigger further action.”