MS Aims for EUR/AUD at 1.53 as Rate Gap Widens

Morgan Stanley is making a call for investors to sell the euro against the Australian dollar, targeting a fall to 1.53, with a stop loss set at 1.69. The bank's analysts believe that the trade works best in an environment of low volatility, which they say is currently prevailing.

The interest rate gap between Australia and Europe has widened significantly over the past year, with the Reserve Bank of Australia (RBA) delivering three 25 basis point hikes to take the cash rate to 4.35 per cent, compared to a single European Central Bank (ECB) move in June that lifted the deposit rate to 2.25 per cent.

Morgan Stanley notes that this spread, roughly 210 basis points in the Australian dollar's favour, leaves forward implied Australian dollar yields the highest in the G10. With implied volatility running very low across FX options markets, the bank expects this to keep attracting capital flows into Australia.