Morgan Stanley Says Yen, Aussie Dollar to Fall Heavily in 2013

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.

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