Morgan Stanley Predicts EUR/AUD to Fall to 1.53 Amid Rate Differentials

Morgan Stanley has advised clients to sell the euro against the Australian dollar, setting a target of 1.53 for the EUR/AUD exchange rate, with a stop loss at 1.69. This recommendation is based on the significant interest rate differential between the two currencies, which has widened considerably in 2026. The Reserve Bank of Australia (RBA) has raised its cash rate three times this year, bringing it to 4.35 percent, while the European Central Bank (ECB) has only increased its deposit rate once, to 2.25 percent, following a prolonged period of stability.

The current spread of approximately 210 basis points in favor of the Australian dollar positions it as having the highest forward implied yields among G10 currencies. Morgan Stanley's analysts note that this yield advantage is particularly compelling in a low volatility environment, which is currently the case in foreign exchange markets. The bank anticipates that the subdued volatility will continue to attract capital flows into Australia, supporting their carry trade strategy.

Additionally, Morgan Stanley suggests that market expectations for further ECB tightening may be overestimated. A potential shift in this outlook could further weaken the euro, providing an additional impetus for the EUR/AUD trade. The combination of the wide interest rate gap, low volatility, and the possibility of a dovish adjustment in ECB policy creates a favorable scenario for the Australian dollar against the euro.

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Source: KLEA News