Morgan Stanley Sees Carry Trade Opportunities in Australian Dollar

In the current scenario, Morgan Stanley has highlighted strong potential for the Australian dollar (AUD) against the euro (EUR), suggesting investors consider carry trade positions. The underlying interest rate differential has widened significantly since 2026, with the Reserve Bank of Australia (RBA) implementing three 25 basis point hikes this year to lift the cash rate to 4.35%, in contrast to a single ECB hike in June that pushed the deposit rate to 2.25% after nearly three years on hold. This results in a spread of approximately 210 basis points in favor of AUD, one of the widest among G10 countries. According to Morgan Stanley, this interest rate disparity ensures higher implied yields for the AUD group, which are currently the highest possible. Given that implied volatility is at multi-month lows, the institution argues favorable conditions for long-term investments could intensify further during periods of calm in the FX market. However, Morgan Stanley also sees potential for a revaluation of expected ECB interest rate hikes, suggesting that a dovish (favorable to economic growth) repricing of the ECB path may add another tailwind to the AUD independent of carry trade dynamics. The bank recommends selling EUR/AUD with a target at 1.53 and stop loss at 1.69, currently priced around 1.6295.