Morgan Stanley: Buy GBP/NZD & Sell EUR/USD

We recommend being long GBP/NZD in the current environment where monetary policy divergence comes to the fore. While the BoE looks set to hike rates in spring 2015, the RBNZ continues to tilt dovishly as falling milk prices set in a spiral of weakening terms of trade and falling dairy farmers’ incomes. Uncertainties about the Scottish referendum have passed and we expect the focus in the case of GBP to return to rate differentials. In that context, yield spreads are moving in favor of higher GBP/NZD. The key risk to this trade is dovish Fed commentary which
will suppress volatility and support NZD.

Enter: 2.0440, Target: 2.2600 , Stop: 1.9970

Short EUR/USD – We are cautious on the common currency, as we expect the EUR to gradually transition into being a funding currency on the back of European banks looking to lend abroad after the asset quality review. Indeed, the smaller-than-expected take-up from the TLTRO operation could fuel market opinion that the ECB needs to do more easing, further weakening the EUR. ECB President Draghi’s speeches this week only further fuelled the notion that the ECB stands ready to do more, with the continuing

Enter: 1.2920, Target: 1.2000, Stop: 1.3060

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