US bank Morgan Stanley (NYSE:MS) has forex reserves on its mind on Friday. The US firm feels that "if reserve managers are rethinking asset allocations, they may also be considering the risk profile of the currencies they hold." Morgan Stanley notes that "in the middle of 2016, 63% of global reserve allocations were in the USD, 20% in the EUR and only 4% in GBP.
Given that commodity prices remain supported and the USD is no longer strengthening at its former pace, we believe there will be room for total FX reserves to rise. Indeed, weekly USD security holdings held at the Federal Reserve suggest that FX reserves may have stopped falling recently." Of course if global foreign exchange reserves are going to tick up, which currencies are held might well influence the direction of forex markets.
It is Morgan Stanley's view that the euro might not necessarily be a beneficiary and that indeed "eurozone political risk events and related EUR bond volatility may provide incentive for reserve managers to reallocate away from the EUR."
Instead, the US bank argues that "GBP seems a good alternative as the Brexit uncertainties are baked into the price and we believe GBP is an undervalued G10 currency." Morgan Stanley has thus added "short EUR/GBP to [their] portfolio."
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