By Clare Connaghan
Currency strategists at Morgan Stanley have lost no time putting
out their 2013 forecasts even though it is still November, and
among their standout predictions are hefty slides in the yen and
Australian dollar.
On Tuesday it said both the Japanese and Australian currencies
would lose more than 10% of their value each against the dollar
over the course of next year.
Morgan Stanley said it expects the yen to weaken to Y90 against
the dollar by year-end from about Y81.57 now and for the Aussie
dollar to drop to $0.90 from $1.0377.
In the case of the yen, the Bank of Japan is likely to face
greater pressure to ease monetary policy following snap elections
on Dec. 16., the world's ninth-largest currencies-dealing bank
said. That is because opposition leader Shinzo Abe, a former prime
minister whose Liberal Democratic Party is ahead in the opinion
polls, has been very vocal about defeating deflation and reversing
the yen's long-term appreciation trend.
"With the Bank of Japan likely to engage in a much more
aggressive easing, this should catalyze yen weakening," the U.S.
bank said.
As a result, Morgan Stanley predicted a sea-change next year in
the way the yen was perceived inside foreign exchange circles.
On the one hand, the yen's safe-haven status would probably
weaken, so there would be less buying of the currency during times
of market stress, Morgan Stanley said. On the other hand, the yen's
role as a so-called funding currency--that is, a currency sold to
fund investments in higher-yielding currencies--would increase, it
said.
For the Australian dollar, higher foreign investment outflows
would likely drive the expected currency decline as the Australian
economy weakens and interest rates fall.
In particular, Morgan Stanley highlighted the potential for
U.S.-based investors to bring capital home.
"With growth differentials between the U.S. and the rest of the
world shrinking and interest rate differentials having been reduced
there is less of an incentive for U.S. investors to seek returns
overseas," the bank said.
Morgan Stanley said it also expected the euro to lose ground
against the buck because more monetary easing and a weaker exchange
rate was needed to improve growth and competitiveness in the euro
zone.
But it warned against betting against the euro too early in the
year as the European Central Bank activated its bond-buying program
to help ease the borrowing costs of some its weaker members.
"By the end of 2013, the euro should trade lower, but could rise
early in the year due to positive portfolio valuation effects
stemming from the activation of the OMT [outright monetary
transactions]," it said.
Morgan Stanley forecast a decline in the euro to $1.20 against
the dollar by the end of next year.
At 1501 GMT, it was trading at $1.2800.
Write to Clare Connaghan at clare.connaghan@dowjones.com