From Morgan Stanley:
We suggest risk caution. The EM and commodity FX downward correction is not yet complete. According to 'Morning Star', ETFs held 23% of emerging markets debt AUM at the end of July. Should there be an ETF focused liquidation, it will hit currencies most which benefited most significantly from inflows. KRW falls into the category. IDR stands on the opposite side explaining the currency's good performance today. EUR longs should work in a risk averse environment.
The EUR long. In reports describing political risks in Italy and France we have made the point why the EUR should rally even with EMU's political outlook becoming less stable.Foreign investors'net holdings within EMU have been sharply reduced following two excessive liquidation rounds in 2010 and 2011/12 going into the famous July 2012 bumble-bee speech by ECB President Draghi and pronounced EUR hedging activities following the move towards negative EUR interest rates starting from May 2014. On the other hand, EMU's financial institutions have reduced their FX denominated holdings trying to take VAR down to levels adequate to the weaker quality of its balance sheets. Hence, the EUR gets directed via commercial, speak current account related flow.
Hopes that expiring EMU bonds could lead to Euro weakness may be premature as those flows kick in only slowly and are currently small in respect of other EUR relevant flows. Interestingly, the increasing share bonds held by central banks will reduce those repayment related flows additionally.
*Morgan Stanley expresses its EUR bullish view via long EUR/JPY position and long EUR/AUD limit order.
