In Forex and Futures Commentary

While the focus as usual tends to be on employment growth (which alone we question in the U.S. on a number of fronts, particularly in production and manufacturing) and increased spending/forecast GDP, a question lingering is the flat-as-a-pancake housing markets that get little mention, and repercussions in recovery of such through 2011, particularly in the United States. A temporary “bandage” is on but the wound is still wide open. Equity and housing markets have been at a complete imbalance through the course of this year, though other correlations, such as equity and FX, have been moving further apart as well. As a comparative measure to the EU, as the Euro has indeed been the source of weight for higher yielding currencies, it becomes a question of timing, and what major events will unfold and when.

Here is a general outline of some heavier points from the 53 page report (links/references below).

  • Euro weakness seen to continue (they target 1.18 vs. USD), weighted down by slower recovery on Ireland, Portugal, Greece and Spain; continued trend in higher productivity and lower inflation in Germany vs. southern European countries
  • Particularly bullish on US recovery vs. G4, citing job growth as the primary catalyst and target GDP close to 3%.
  • The “Euro flu” expected to spread across the G10 basket, maintaining weight on higher yielding currencies, particularly noted through the beginning of the year.
  • USD/JPY under continued pressure from low global rates, though as inflation increases and rates adjusted seek depreciation of JPY
  • Believe the Fed will not continue QE program and that lows have been seen in US yields.
  • Stating undervalue of the pound vs. peers and seeking a 0.77 trough in EUR/GBP “as some of the large depreciation following the onset of the financial crisis is unwound”
  • CAD a “dark horse” for 2011, citing standby US growth/recovery as a means for growth
  • A buried article in this heap starts on page 28 and discusses 2011 as a year of less correlation and volatility. As I was about to get into detail discussing the unraveling of FX/equity/bond correlations losing path throughout the course of 2010, there is a 2 page cover discussing the topic.

Click the image below to download the 53 page PDF or simply CLICK HERE (downloads straight from source page at – other market outlook downloads available)

Source: Morgan Stanley
December 9, 2010
FX Pulse: 2011 Outlook and

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Showing 3 comments
  • ahmed903

    Thanks for sharing and posting your insightful thoughts that are ever so helpful.

  • wayne theron


    i wonder how they see the pound so undervalued? i live in London and things are tough here with the horizon looking bleak indeed. our debt is 4.8 trillion and the government is not shrinking the public sector enough. in addition, they continue to inflict higher taxes which is only making the environment unpalatable to businesses. i really don't see things getting much better for a long time..

  • nobrainertrades

    In their sense its more of a pure comparative "market" or trading perspective, as opposed to the massive underlying debt of the West. Despite current debt conditions, markets are still buying; commodities have popped out of their shell and they're chasing the market, as is the norm with these or any other guys….contrarian analysis is rare amongst these crews; they're afraid to be wrong and a quick way of getting noticed in terms of being wrong is to simply fade a harsh trend.

    Particularly in this example their they're comparing the Pound to the Euro, who's woes these days appear much more cumbersome than those of the UK. That's basically their major point.

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