EUR/USD: Is the Negative Risk Relation Intact?—Morgan Stanley

10/08/2015 9:00 am EST

Focus: FOREX

For the benefit of forex traders with questions pertaining to what impacts this currency pair—currently stuck in a wedge—moving forward, Yohay Elam, of ForexCrunch.com, shares the view of the team at Morgan Stanley about whether or not the inverse relationship between the EUR and risk (equity markets) still exists.

EUR/USD is looking for a new direction, basically stuck in a wedge. What impacts the pair now?

The team at Morgan Stanley weighs in on the change of its behavior:

Here is their view, courtesy of eFXnews:

A more risk positive environment appears to be developing for currencies markets which should continue to provide some short-term relief for commodity-related currencies and selective EM currencies, says Morgan Stanley.

“However, the reaction in currency markets, so far, has been more muted than may have been expected. This may cause some questioning of the relationship between currencies and the risk environment,” MS adds.

The obvious example for that, according to MS, is EUR/USD where despite the bounce back in risk sentiment, it remained in a range.

Does the inverse relationship between the EUR and risk (equity markets) still exist?

“We think it does, although it has been challenged on occasions recently. Indeed, monetary policy expectations are also having a strong influence on the EUR. Our FX drivers analysis suggests that front-end rates are having an equally strong positive relationship with the EUR as the negative risk relationship,” MS answers.

“Hence, while we believe that the relationship between the EUR and the global risk picture remains intact, it has loosened and is now more prone to challenges and shift in policy expectations,” MS adds.

“Overall, in the current environment we expect the EUR to put pressure on the lower end of the range, with a break below 1.1120/00 opening the way for a EUR/USD decline towards 1.0850. But risk-off events should still generate EUR spikes higher,” MS concludes.

By Yohay Elam, Founder, Writer, and Editor, ForexCrunch.com

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