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FX BANK FORECAST · COVERAGE
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Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 36 institutional desks. No promotion.
FX BANK FORECAST · COVERAGE
Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 36 institutional desks. No promotion.
The desk interprets Morgan Stanley's bullish outlook on the Australian dollar against the euro as a favorable carry trade opportunity, bolstered by a notable increase in the interest rate differential favoring the Aussie. As highlighted in their recent report, the Reserve Bank of Australia's actions have significantly widened the rate gap, moving the cash rate to 4.35% following three interest rate hikes, whereas the European Central Bank only raised its deposit rate by 25 basis points to 2.25%. This substantial spread not only offers the Australian dollar the highest forward implied yields within the G10 but also signals an attractive environment for carry flows, especially given the current lull in FX volatility source.
Morgan Stanley's recommendation plays on the current backdrop of low volatility and significant rate differentiation, with targets for EUR/AUD set at 1.53, presenting a compelling trade against a stop loss positioned at 1.69. The 210-basis points difference resulting from the RBA's tightening against minimal movement from the ECB makes the Australian dollar particularly compelling for investors seeking yield in lower-risk environments.
Furthermore, the low implied volatility suggests that the carry trade can attract substantial capital inflows into Australia unless market conditions abruptly shift. The report warns of potential downsides related to shifts in volatility; a resurgence could lead to unwinding carry positions rapidly if the environment becomes less favorable.
The current consensus target for EUR/AUD stands at 1.075 with a range of 1.04 to 1.12. Significant targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This bullish forecast aligns more closely with jpmorgan's view at the upper range of the spectrum, potentially diverging from bofa's more conservative approach.
Firms like jpmorgan are supportive of a stronger Australian dollar, bolstered by favorable interest rates, while bofa offers a more cautious stance on AUD strength. This divergence highlights the broader debate over central bank paths and interest rate projections across G10 economies.
The dynamic between EUR/AUD influences broader currency pairs like AUD/USD and the directional stance of the RBA against developments from the ECB, indicating wider macroeconomic implications for carry trades.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
Market implications
Traders should monitor the EUR/AUD closely for price movements towards the target of 1.53, especially given the current lack of high-impact events that may disrupt the status quo. Should volatility indices remain contained, this trade could attract significant capital inflows into the Aussie.
Risks to this view
A key risk to this trade is a sudden spike in volatility, which could trigger a rapid reversal of carry positions. Additionally, any dovish pivot from the RBA, diverging from current rate hike expectations, may undermine the favorable rate differential and impact the overall strength of the AUD.
The rate differential underpinning this call has widened materially over 2026, with the RBA delivering three 25 basis point hikes this year to take the cash rate to 4.35 per cent, against a single ECB move in June that lifted the deposit rate to 2.25 per cent after nearly three years on hold. That leaves a spread of roughly 210 basis points in the Australian dollar's favour, among the widest in the G10, which Morgan Stanley says gives Australia the highest forward implied yields in the group. With implied volatility sitting near multi-month lows, the bank argues the setup favours carry flows into Australia over the near term , a dynamic that tends to compress further in genuinely calm FX conditions but can unwind sharply if volatility resets higher.
The trade also leans on a view that market pricing for further ECB tightening looks overdone, meaning any dovish repricing of the ECB path would add a second tailwind against the euro leg independent of the carry dynamic itself. --- Morgan Stanley is betting the widest rate gap in the G10 and unusually calm FX markets will keep pulling carry flows toward the Australian dollar and away from the euro. Summary: Morgan Stanley recommends selling the euro against the Australian dollar while FX volatility stays subdued The bank targets EUR/AUD falling to 1.53, with a stop loss at 1.69, from around 1.6295 currently Forward implied Australian dollar yields are the highest in the G10, Morgan Stanley says, while implied volatility is very low The RBA has delivered three 25 basis point hikes in 2026, taking the cash rate to 4.35 per cent, against a single ECB hike in June to 2.25 per cent Morgan Stanley says the low volatility backdrop should keep attracting capital flows into Australia The bank also sees scope for markets to lower implied ECB policy expectations, arguing current rate rise bets for the eurozone look overdone Morgan Stanley is recommending clients sell the euro against the Australian dollar, targeting a fall to 1.53, with a stop loss set at 1.69, arguing the trade works best while foreign exchange volatility stays subdued. The call rests on one of the widest interest rate gaps in the G10, according to the bank's analysts.
The Reserve Bank of Australia has raised its cash rate three times in 2026, taking it to 4.35 per cent as it worked to contain inflation that has stayed persistently above target. The European Central Bank, by contrast, has moved only once this year, lifting its deposit rate by 25 basis points in June to 2.25 per cent, its first increase in nearly three years and a decision driven largely by the Iran war's impact on eurozone energy costs and inflation. The resulting spread, roughly 210 basis points in the Australian dollar's favour, leaves forward implied Australian dollar yields the highest in the G10, Morgan Stanley says.
That yield advantage matters most in an environment of low implied volatility, which is exactly the backdrop the bank sees at present. Carry trades, where investors borrow in a low yielding currency to fund positions in a higher yielding one, depend on calm markets to work, since a volatility spike can quickly erase the yield pickup through currency moves alone. With implied volatility running very low across FX options markets, Morgan Stanley expects this to keep attracting capital flows into Australia, reinforcing the case for the trade so long as that calm persists.
The euro side of the trade carries its own catalyst. Morgan Stanley argues markets are currently pricing in too much further ECB tightening, and that this view could shift lower as incoming data comes in. Should the implied ECB policy path move down, that would weigh on the euro independently of the carry dynamic, giving the trade a second source of downside beyond the yield differential alone.
Together, the wide rate gap, calm volatility conditions, and the potential unwind of hawkish ECB pricing form the basis for Morgan Stanley's view that the path of least resistance for EUR/AUD is lower from here. This article was written by Eamonn Sheridan at investinglive.com.
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