The bank cites a 210 basis point rate gap and low FX volatility as drivers for favoring the Australian dollar over the euro.
Morgan Stanley has set a target of 1.53 for EUR/AUD, recommending a carry trade into the Australian dollar. The call is underpinned by a 210 basis point rate differential, the widest in the G10, following three 25 basis point hikes by the RBA this year, lifting the cash rate to 4.35%.
The ECB, in contrast, has raised its deposit rate just once in June to 2.25% after nearly three years of no changes. Morgan Stanley notes that implied Australian dollar yields are the highest in the G10, while FX volatility remains near multi-month lows, creating a favorable environment for carry flows.
The bank also argues that market pricing for further ECB tightening appears overdone, suggesting a dovish repricing could add further pressure on the euro. The trade includes a stop loss at 1.69, with EUR/AUD currently trading around 1.6295.