Morgan Stanley Still Like EURUSD Downside Via Puts

Morgan Stanley write “data continue to suggest that European growth data are tracking well below potential.”

• “The longer below-potential growth persists, the more likely we are to see a negative output gap.”
• “A negative output gap implies reduced demand-driven inflation and creates risks that the market will price in not just a terminal rate at neutral but perhaps even below.”
• “Such a rapid cutting cycle suggests a lower EUR/USD spot, higher volatility and lower EUR carry, all of which render EUR a more attractive funding currency.”
• “EUR/USD downside remains an attractive, positive carry hedge for a variety of macro scenarios, including a more dovish pricing for the ECB's cutting path. We continue to recommend buying 1-year EUR/USD puts at 1.07.”