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					                                                                        MORGAN STANLEY FIXED INCOME RESEARCH

                                                                        Morgan Stanley & Co.                     Stephen Jen
                                                                        International Limited
                                                                                                                 Head of Currency Research
                                                                                                                 Stephen.Jen@morganstanley.com
                                                                                                                 +44 20 7425 8583

                                                                        For research analysts, please see contact list at the back of this report.




         April 20, 2006
                                                                        Recommended Trades
         Currencies
Global                                                                                                        Action                                              Start Date


         FX Pulse                                                       NOK/SEK
                                                                        CAD/SEK
                                                                                                              Hold short
                                                                                                              Hold short
                                                                                                                                                                  12 Apr 06
                                                                                                                                                                   9 Mar 06
                                                                        GBP/AUD                               Take profit on short                                30 Mar 06

         Oil Slick                                                      EUR/GBP
                                                                        GBP/USD
                                                                                                              Establish long
                                                                                                              Stopped out of short
                                                                                                                                                                  20 Apr 06
                                                                                                                                                                   9 Mar 06

         USD: The Dollar to Depreciate Gradually This Year.             EUR/JPY                               Stopped out of short                                  6 Apr 06

         Holding a short-dollar position is sensible, as USD is         Please see page 6 for more details.

         expected to weaken this year due to cyclical reasons.
         However, long-EUR/USD is more based on speculation             Forecasts 2006E
         than fundamentals, while short-USD/Asia is the higher-                                      Spot         2Q06E              3Q06E             4Q06E            1Q07E
         quality trade, as the fundamentals are more compelling.        EUR/USD                      1.23             1.20                 1.22            1.24             1.26
                                                                        USD/JPY                       118              113                 108              106             102
         USD: GCC’s Monetary Union and the Dollar. How the              EUR/JPY                       145              136                 132              131             129
         planned GCC monetary union could affect the USD is an          EUR/GBP                      0.69             0.71                 0.72            0.72             0.72
         important issue. However, (i) the GCC is likely to opt for a   GBP/USD                      1.78             1.69                 1.69            1.72             1.75
         clean USD peg, not a basket peg involving the EUR, and
                                                                        Note: Forecasts for end-of-period. Forecasts last updated on 12 January 2006.
         (ii) it should not diversify its reserves away from USD into   E = Morgan Stanley Research Estimates

         EUR as a result of the monetary union.
                                                                        Question of the Week:*
         G10: Reserved Reserve Banks. Asset markets are                 Benchmark crude oil prices have recently challenged post-
         sanguine while central banks remain reserved about future      Katrina highs above $70 per barrel. What do you think is the
                                                                        best explanation for the recent increase in crude oil prices from
         global growth. At this point in the cycle, currency            their mid-February lows near $58 per barrel?
         momentum trades are not lucrative, in our view, and we
         prefer staying in the crosses.                                   65%
                                                                                                                            60%
                                                                          60%
                                                                          55%
         USD: G7 Concerted Concern. Global imbalances and                 50%
                                                                          45%
         currency levels have been highlighted ahead of the G7            40%
         this week. We do not think this is the time for concerted        35%

         concern.                                                         30%
                                                                          25%         21%
                                                                          20%                           17%
         SKK: Staying Konvergence-Konstructive. We continue               15%

         to like SKK on a fundamental basis and highlight the             10%
                                                                           5%
         currency’s resistance in the recent sell-off. Local politics      0%
                                                                                                                                                  1%
                                                                                                                                                                   0%

         and loose monetary conditions are still a concern, but with             Real demand for
                                                                                    crude oil
                                                                                                     Speculative
                                                                                                   demand for crude
                                                                                                                       Fears of lower
                                                                                                                       supply due to
                                                                                                                                           Lack of supply due
                                                                                                                                            to low investment
                                                                                                                                                                  None of
                                                                                                                                                                the above
         a potential to deliver positive surprises. We expect the                                       oil           political/security
                                                                                                                       developments
                                                                                                                                              in the energy
                                                                                                                                                 industry
         MPC to surprise the market with a 50 bp rate hike lending
         further near-term support for the SKK.                         * We queried Morgan Stanley professionals on this question of the week;
                                                                        percentages are based on 70 responses.
                                                                        Source: Morgan Stanley

                                                                        This material has been prepared in accordance with our conflict
                                                                        management policy. The policy describes our organizational and
                                                                        administrative arrangements for the avoidance, management and
                                                                        disclosure of conflicts of interest. The policy is available at
                                                                        www.morganstanley.com/institutional/research.
                                                                        Please see additional important disclosures at the end of
                                                                        this material.
                                                                             MORGAN STANLEY FIXED INCOME RESEARCH

                                                                             April 20, 2006
                                                                             FX Pulse
                                                                             Oil Slick




Global Event Risk Calendar
C. Ted Wright

         Country/                                           Morgan Stanley
Date     Currency Event                                          Forecast       Market            Last    Our comment

21 Apr   AUD      Terms of trade (Q1)                                                                     Terms of trade growth remain very positive for AUD
Fri      CAD      Wholesale sales (Feb)                                         0.3%M           1.8%M
         CAD      Retail sales (Feb)                                            0.2%M           1.4%M     Domestic demand remains firm in Canada
         FRF      Consumer spending (Mar)                         -1.2%M       -1.1%M           1.8%M
         INT      IMF/World Bank spring mtgs (Wash. DC)
         INT      G7 Fin Mins and CB Govs mtgs (Wash. DC)                                                 Pressure remains on China to push with FX reform
         ITL      Trade (Mar)                                                                  -€4.1bn    Italian businesses continue to lose market share
         ITL      Retail sales (Feb)                                            0.2%M           0.1%M     Domestic demand remains rather subdued
         JPY      Tertiary index (Feb)                            -1.0%M       -1.1%M           1.4%M
22 Apr   INT      IMF/World Bank spring mtgs (Wash. DC)                                                   Global imbalances once again in the headlines
23 Apr   INT      IMF/World Bank spring mtgs (Wash. DC)                                                   Final day. End of meeting press conferences likely
24 Apr   AUD      PPI (Q1)                                                                      0.8%Q
Mon      CAD      Parliament votes on Throne Speech                                                       Minority government likely to survive confidence vote
         DEM      Manufacturing orders (Feb)                       0.6%M                        1.4%M
         DEM      Industrial production (Feb)                      0.7%M       0.6%M           -0.1%M
         EUR      BNB business survey (Apr)                                                        0.9
         EUR      ECB Trichet spks (New York, NY)                                                         Speech at CFR. Immediately follows IMF/G7 meetings
         EUR      ECB Gonzales-Paramo spks (New York, NY)                                                 Topic: “Global Financial Imbalances”
         FRF      INSEE business confidence (Apr)                                                   105   INSEE survey at cyclical highs. Likely to peak shortly
         GBP      Retail sales (Mar)                               0.3%M                        0.5%M     Key release. Consumer outlook uncertain
         GBP      PSNCR (Mar)                                                                     £1.7b
25 Apr   CAD      BoC rate decision                                4.00%                         3.75%    25bp hike expected. BoC may signal pause in cycle
Tue      CHF      Trade (Mar)                                                                 Sfr 910m    Both export and import growth has accelerated lately
         DEM      IFO business survey (Apr)                                                       105.4   Key release. IFO at its highest levels since early 1991
         DEM      CPI – preliminary states (Apr)*                                               1.8%Y
         EUR      Current account (Feb)                                                        -€11.3b
         EUR      ECB Weber spks (Berlin)                                                                 Weber considered a hawk on the ECB board
         EUR      ECB Papademos spks (Brussels)                                                           Testimony to European Parliament
         EUR      ECB Liebscher spks (Vienna)                                                             Topic: “Balance of Payments 2005”
         INT      Holiday (Markets closed)                                                                ANZAC day. Australia, New Zealand closed
         SEK      Trade (Mar)                                                Skr 12.5b         Skr 12b    Swedish exports benefit from strong global capex growth
         USD      Consumer confidence (Apr)                         105.0        106.0           107.2    Higher energy prices an emerging risk to sentiment
         USD      Existing home sales (Mar)                        6.60m        6.70m           6.91m     Key release. Market very sensitive to housing data
         USD      FOMC Bies spks (New York, NY)                                                           Speech at NABE meeting
26 Apr   AUD      CPI (Q1)                                                                      0.5%Q     Inflation already at top of RBA 2-3%Y range
Wed      EUR      ECB Likkanen spks (Turku)
         GBP      GDP – preliminary (Q1)                           0.6%Q                       0.8%Q      UK economy decelerated in Q1 to a trend-like pace
         NOK      Norges Bank rate decision                        2.50%                        2.50%     No change expected. 25bp rate hike likely in June
         NZD      NBNZ business confidence (Apr)                                               -51.0%     Confidence improved in March, thanks to lower NZD
         SEK      LFS unemployment (Mar)                                         5.3%            5.6%     Labour market improving gradually
         USD      Durable goods orders (Mar)                       0.5%M       1.6%M           2.7%M      Most expect capex to remain strong in 2006
         USD      New home sales (Mar)                              1100k       1100k           1080k     Series surprised sharply on the downside in February
         USD      Fed Beige Book (10 May mtg)
         USD      US Treasury Snow spks (Wash. DC)                                                        Topic: “Advocacy in Action 2006”
27 Apr   CAD      BoC Monetary Policy Report                                                              Key signaling document. Also updates BoC forecasts
Thu      CAD      Manufacturing orders (Apr)                                                      1.0     Manufacturing industry remains under pressure
         DEM      Unemployment, sa (Apr)                                                         +30k     Noisy series. Gradual improvement in labour market
         DEM      ‘Six institutes’ forecasts published                                                    ‘Six Institutes’ produce an authoritative macro forecast
         EUR      ECB Garganas spks (Athens)                                                              Presentation of Bank of Greece Annual Report
         ITL      ISAE business confidence (Apr)                                              94.2
         NZD      RBNZ rate decision                               7.25%                    7.25%         RBNZ likely maintains view no easing likely in 2006
         NZD      Trade (Mar)                                                -N$297m      -N$257m         Export should eventually benefit from weaker NZD
         SEK      NIER business confidence (Apr)                                               3.0        Business confidence remains favorable
         SEK      NIER consumer confidence (Apr)                                  15.3        15.5        Consumer confidence strong. Consumption is firm
         USD      Initial claims (22 Apr wk)                                                  303k
         USD      FOMC Bernanke spks (Wash. DC)                                                           Key event. Testimony on the economic outlook
28 Apr   AUD      RBA Macfarlane spks (Sydney)                                                            Macfarlane not expected to discuss monetary policy
Fri      CAD      GDP (Feb)                                                  0.2%Mec            0.2%M     GDP likely tracking around 3.0% in Q1




See additional important disclosures at the end of this material.                                                                                           2
                                                                                    MORGAN STANLEY FIXED INCOME RESEARCH

                                                                                    April 20, 2006
                                                                                    FX Pulse
                                                                                    Oil Slick




Global Event Risk Calendar (Cont.)
          Country/                                                 Morgan Stanley
Date      Currency Event                                                Forecast       Market           Last    Our comment

28 Apr     CHF        KOF leading indicator (Apr)                                                       1.30    KOF still consistent with above-trend growth
Fri        CHF        SNB Annual General Meeting (Bern)                                                         SNB President Roth to speak, among others
           EUR        M3 money supply (3m/Y) (Mar)                                                    7.6%Y     Hawks at ECB remains focused on M3 growth
           EUR        EU Commission economic confidence (Apr)                                          103.5
           EUR        HICP – preliminary (Apr)                                                        2.2%Y     ECB continues to observe upside risks to inflation
           FRF        Consumer confidence (Apr)                                                          -26    Confidence potentially affected by strikes, politics
           FRF        Unemployment (Mar)                                                               9.6%     High unemployment remains politically sensitive issue
           FRF        PPI (Mar)                                                                       3.5%Y
           GBP        Gfk consumer confidence (Apr)                                                       -7    Confidence soft, despite firming housing market
           ITL        CPI – preliminary cities (Apr)                                   2.1%Y          2.1%Y
           ITL        Parliament reconvenes                                                                     Process of electing new leadership, and President begins
           JPY        BoJ rate decision                                    0.00%                       0.00%    BoJ “Outlook for Activity and Prices” released
           JPY        Unemployment (Mar)                                                4.2%            4.1%    Unemployment at cycle lows. Labour market strong
           JPY        CPI (Mar)                                                        0.0%Y           0.4%Y    Key release. BoJ expects inflation to trend higher
           JPY        Core CPI (Mar)                                                   0.2%Y           0.5%Y
           JPY        Household spending (Mar)                                        -1.0%Y          -1.5%Y
           JPY        Industrial production – preliminary (Mar)                       0.2%M          -1.2%M     Output growth remains favorable in Q1
           JPY        Retail sales (Mar)                                               0.8%Y           1.0%Y
           NOK        Business tendency survey (Q1)                                                             Businesses in Norway remain upbeat
           NOK        GPF – Global NOK selling (May)                                          Nkr 320m/d
           NZD        Building permits (Mar)                                                     12.4%M         Housing sector expected to slow further
           SEK        Riksbank rate decision                               2.00%                   2.00%        No change expected. 25bp rate hike likely in June
           SEK        Retail sales (Mar)                                                           7.7%Y        Consumption growth remains favorable
           USD        GDP – preliminary (Q1)                                4.5%        5.0%        1.7%        GDP growth likely accelerated in Q1
           USD        U Michigan consumer confidence (Apr)                                           89.2
           USD        Chicago PMI (Apr)                                                  58.0        60.4       Likely to shape expectations ahead of national ISM
30 Apr     INT        Deadline for IAEA report on Iran nuclear programme                                        Report to serve as basis for UNSC discussions on Iran
           INT        Deadline for WTO ‘modalities’ on Doha round                                               Failure to meet deadline will fan concerns about Doha
1 May      INT        Holiday (Markets closed)                                                                  Labour Day. CHF, EUR, GBP, NOK, SEK closed
Mon        JPY        Golden Week begins                                                                        Formal holidays on 3-5 May. But most take whole week
           USD        Personal income (Mar)                                                           0.3%M
           USD        Core PCE (Mar)                                                                  1.8%Y     Considered the Fed’s preferred measure of inflation
           USD        Construction spending (Mar)                                                     0.8%M     Construction data affected by weather recently
           USD        ISM – manufacturing (Apr)                                                          55.2   Key release. Decline in ISM in March surprised many
2 May      CHF        PMI (Apr)                                                                          65.2
Tue        EUR        PMI – manufacturing (Apr)                                                          56.1   Key release. Manufacturing PMI currently at cycle highs
           GBP        PMI – manufacturing (Apr)                                                          50.8   UK manufacturing industries losing market share
           NOK        Retail sales (Mar)                                                             -1.8%M     Domestic demand remains firm, although data volatile
           SEK        PMI (Apr)                                                                          62.5   Growth in Sweden remains very firm
           USD        Motor vehicle sales (Apr)                                                        16.6m    Early read on demand conditions in April
3 May      AUD        RBA rate decision                                    5.50%                       5.50%    No change expected. RBA likely on hold through Q2
Wed        USD        ISM – non-manufacturing (Apr)                                                      60.5
4 May      CAD        Ivey PMI (Apr)                                                                     67.2   Volatile series. But currently at cycle highs
Thu        CHF        CPI (Apr)                                                                       1.0%Y     Inflation remains low in Switzerland
           EUR        ECB rate decision                                    2.50%                      2.50%     No change expected. 25bp rate hike likely in June
           GBP        BoE rate decision                                    4.50%                      4.50%     No change expected. BoE on hold for now
           NOK        Unemployment – registered (Apr)                                                   2.9%    Registered data surprised on downside in March
5 May      AUD        RBA Statement on Monetary Policy                                                          Potential for RBA to signal a more hawkish stance
Fri        CAD        Labour force survey (Apr)                                                      +50.5k     Labour market remains firm. Unemployment at 30yr lows
           EUR        Ecofin meeting (Brussels)
           USD        Non-farm payrolls (Apr)                                                          211k     Labour market continues to tighten
8 May      CHF        Special session of parliament begins                                                      Until 11 May
           INT        BIS G10 CB Govs meeting (Basel)                                                           ECB President Trichet to deliver press conference
9 May      AUD        2006/2007 budget tabled in parliament                                                     Treasurer Costello has scope to loosen fiscal policy
10 May     GBP        BoE Inflation Report                                                                      BoE forecasts suggest no need for policy changes
           USD        FOMC rate decision                                   5.00%                      4.75%     25bp hike expected. Fed may signal pause afterwards
1 Jun      INT        OPEC Conference (Caracas, Venezuela)                                                      141st meeting of the OPEC Conference
8 Jun      NZD        RBNZ Monetary Policy Statement                                                            RBNZ continues to insist no easing likely in 2006
9 Jun      INT        G8 Fin Mins meeting (St Petersburg, Russia)                                               Pre-summit meeting of Finance Ministers only
15 Jun     CHF        SNB rate decision                                    1.50%                      1.25%     25bp rate hike expected. SNB gradually normalizing rates
           EUR        European Council (Brussels)                                                               2 days. EU heads of government to meet
20 Jun     SEK        Riksbank Inflation Report                                                                 Key signaling document. Growth is strong in Sweden
29 Jun     NOK        Norges Bank Inflation Report                                                              Key signaling event for the Norges Bank
15 Jul     INT        G8 Summit (St Petersburg, Russia)                                                         President Putin to host G8 heads of government
2 Nov      USD        Congressional midterm elections                                                           House and 1/3 of Senate up for election. Protectionism?
18 Nov     INT        G20 Fin Mins and CB Govs mtg (Melbourne)                                                  G20 increasingly prominent, but still not the G7
* Denotes timing approximate.
Source: Morgan Stanley Research



See additional important disclosures at the end of this material.                                                                                                3
                                                                    MORGAN STANLEY FIXED INCOME RESEARCH

                                                                    April 20, 2006
                                                                    FX Pulse
                                                                    Oil Slick




FX Tactical Trade Recommendations
FX Strategy Team                                                    Exhibit 1
                                                                    Performance Stats
Establish: Long EUR/GBP (Entry: 0.6927, Stop: 0.6865).
We remain bearish GBP. This is primarily based on a cyclical                                       Tactical
view: we think the UK economy is likely to post below-trend                                         Macro        Top Picks         Model            Carry
                                                                                                   Trades          2006*          Portfolio        Portfolio
growth this year, as consumption remains weak and the
                                                                    Weekly P&L                     -0.48%         -1.83%           0.32%            0.28%
economy fails to rebalance. Recent data are all consistent
                                                                    Year to Date
with such an outcome. Lately, however, GBP has been
                                                                    Sharpe Ratio               3.4                   2.0             1.6              -0.9
boosted by a combination of excessive short positioning and         Cumulative Returns        4.9%                  7.5%            1.8%            -1.4%
some one-off buying of GBP. We expect the latter to abate           Realized Vol.             6.8%                 18.2%            5.3%             7.4%
over time, and believe the former is less of an issue at these      Since Inception, 29 Apr 2004
levels. We target a move to 0.71.                                   Sharpe Ratio               1.5                   0.3             1.2             1.3
                                                                    Returns (annualized)      9.5%                  4.8%            6.4%            8.3%
Hold: Short NOK/SEK (Entry: 1.1887, Stop: 1.2050). We
                                                                    Realized Vol.             6.5%                 17.3%            5.2%            6.5%
believe the upcoming Norges Bank rate decision and
                                                                    Source: Morgan Stanley Research
statement this week (26 Apr) is unlikely to bring comfort to        *See “Reading FX Tactical Trade Performance” section for 2006 outstanding trades.
NOK bulls. In particular, we think the bank will say that           Note: The portfolio represents hypothetical, not actual, investments.
                                                                    For more details regarding calculations, please see “Reading FX Tactical Trade
currency strength will bring down inflation looking ahead and       Performance” at the back of FX Pulse. Our FX Performance Data Package contains
                                                                    complete performance statistics.
also suggest there have been no offsets – i.e., upside
                                                                    Exhibit 2
surprises to growth – to this development. In contrast, the
                                                                    Macro Tactical Trades: Cumulative Returns
Riksbank rate decision (28 Apr) should be a neutral to slightly
positive event for SEK. The bank is likely to signal that it will
resume its tightening cycle in June. We target a move towards        114
1.1650.
                                                                     110                                                                   2006
Hold: Short CAD/SEK (Entry: 6.8052, Stop: 6.8050). We
think the softer tone to Q1 data, as well as the favorable news      106
on capacity constraints in the Business Outlook Survey, are
                                                                     102
enough to push the bank to the sidelines, albeit with a
tightening bias, after a 25bp rate hike this week (25 Apr). We         98
do not believe the market shares this view. In contrast,               Apr-04        Aug-04       Dec-04       Apr-05        Aug-05       Dec-05
economic data in Sweden remain very robust, and we think
                                                                    Source: Morgan Stanley
the market still underestimates the determination of the
Riksbank to normalize interest rates in the months ahead. We        Exhibit 3
target a move towards 6.45.                                         Global Risk Demand Index
Take profit: Short GBP/AUD (Entry: 2.4450, Exit: 2.4115).
                                                                      4.00
We turn neutral on AUD at current levels. In late March, we
                                                                      3.00
thought the market had mispriced the more favorable
                                                                      2.00
developments in the local economy, and that event risk in
early April would re-focus market attention on these variables.       1.00

This has largely taken place, and RBA expectations have               0.00
shifted dramatically. While we believe the probability of RBA        -1.00
tightening this year has increased, we are not sure any new          -2.00
hawkish signals will materialize in the RBA Statement (5             -3.00
May). Thus, we would exit any outstanding long AUD                       Nov-03       Apr-04       Sep-04       Feb-05       Jul-05       Dec-05
positions.
                                                                    Source: Morgan Stanley




See additional important disclosures at the end of this material.                                                                                          4
                                                                       MORGAN STANLEY FIXED INCOME RESEARCH

                                                                       April 20, 2006
                                                                       FX Pulse
                                                                       Oil Slick




USD: The Dollar to Depreciate Gradually This Year
Stephen Jen                                                            On the other hand, I expect a down-trade in USD/JPY and
                                                                       USD/Asia to be of higher quality with lower volatility.
   • Holding a short-dollar position is sensible, as USD is            • Question 1. Am I worried about the recent rise in the
     expected to weaken this year due to cyclical reasons.             long bonds and oil prices? There is a debate on whether
     However, long-EUR/USD is the low-quality trade more based         the recent rise in the long bond yields, along with the surge in
     on speculation (e.g., diversification) than fundamentals, while   oil prices, will undermine the US and global economy. I
     short-USD/Asia is the higher-quality trade, as the                belong to the more sanguine camp, and believe that most of
     fundamentals are more compelling.
                                                                       the sell-off in long bonds so far in the major economies is due
                                                                       to surging global demand. The global economic backdrop is
                                                                       remarkably positive, with growth becoming more balanced
My Key Thesis for 2006 Remains Unchanged                               geographically (between the US and the rest of the world) and
I continue to hold the view that, in 2006, the USD is likely to        sectorally (between consumption and investment). Global
weaken modestly against the EUR and GBP, but more                      equities are buoyant; commodity prices unrelated to Iran have
sharply against the Asian currencies. I stress that this               also risen with crude oil prices. Iran certainly matters, but I
prospective USD depreciation will take place against a very            don’t believe it has been the key factor behind the recent
favourable backdrop of a robust US and global economy.                 trends in oil, non-oil commodity prices, and financial prices. If
There is no need to panic about the dollar, and one can justify        anything, if Iran were the main reason behind the rising oil
holding short-dollar positions without subscribing to the ‘sky-        prices, bonds should have rallied and equities been sold off.
is-falling’ view of the world. I expect the USD to gently turn         The higher long bond yields are also consistent with the
with the US housing cycle. EUR/USD will likely gradually drift         expectation that corporates may no longer continue to
higher, but I believe the scope of this rally will be limited, and     accumulate financial assets at such a rapid pace as they have
volatility will be high. On the other hand, USD/Asia has much          in the past few years. According to the IMF’s latest World
greater scope to sell off, with lower volatility and a clearer         Economic Outlook, during 2003-04, corporates in the G7
trend. In this note, I reiterate my call on the dollar, and, in a      countries accumulated US$1.3 trillion of financial assets. But
Q&A format, comment on several issues that may interest                with excess capacity narrowing, the IMF expects corporates
investors.                                                             to start deploying these financial resources to expand
                                                                       capacity. I am rather sympathetic to this view. Far from an
USD to Soft-Land                                                       exogenous negative shock to the global economy, the back-
I will not repeat the details of what I have in mind, but only         up in long bond yields is consistent with the expectation that
stress that a cyclical USD depreciation is likely this year. My        the balance of demand and supply for corporate credit may
view should not be confused with the prevalent structurally            start to shift.
USD-bearish view; the dollar is still sound from a structural          To the extent that strong global aggregate demand may be
perspective. Ideas like wholesale USD diversification or the           the key reason behind the higher long bond yields and higher
US adopting a weak dollar policy simply don’t make sense to            oil prices, the latter are only ‘headwinds’ because the global
me, as the former would be detrimental to the major reserve            economy is running too fast. If the global economy
holders in the world, while the latter would be a dangerous            decelerates, these endogenous ‘headwinds’ should abate.
policy for the US.
                                                                       There will be some regional implications. First, strong
Between the EUR and JPY, I favour the JPY. It takes so                 demand for oil by Asia, as far as the US is concerned, is a
much hard work to justify holding long EUR/USD positions               supply shock, not a demand shock. More specifically, if the
based on the European economic fundamentals. It would be               incremental demand for oil comes from Asian producers, the
even harder if one considers the structural issues plaguing            US consumers will be hurt. (Of course, one could use the
Euroland. Investors have found themselves trying to justify            same logic and equally convincingly argue that demand from
holding long-EUR/USD positions based on speculation (e.g.,             US consumers hurt the producers in Asia.) In any case, this
diversification) rather than facts. This is why, even though I         headwind from higher energy prices will hit different
expect EUR/USD to gradually drift higher this year, the                consumers of oil differently. I concur with our US economist
magnitude of the move will be limited yet volatility will be high      Dick Berner that we might enter a temporary soft patch in US
(i.e., the ‘Sharpe Ratio’ of this trade in EUR/USD will be low).       consumption partly because of this surge in oil prices. I also

See additional important disclosures at the end of this material.                                                                     5
                                                                                                    MORGAN STANLEY FIXED INCOME RESEARCH

                                                                                                    April 20, 2006
                                                                                                    FX Pulse
                                                                                                    Oil Slick




concur with his view that the US economy is likely to reassert                                      • Question 3. How will the currency politics between the
itself later this year.                                                                             US and China be resolved? We may be witnessing an
                                                                                                    important shift in the undercurrents in the US-Sino currency
Similarly, if the world’s excess savings are indeed going
                                                                                                    politics. First, I believe the US Treasury has been trying hard
through an inflection point, then the currencies of the capital
                                                                                                    to broaden the scope of the debate away from the Chinese
deficit countries, such as the US, UK, Australia and New
                                                                                                    yuan and toward a more comprehensive set of issues that
Zealand should suffer, while the currencies of the capital
                                                                                                    better address the fundamental problem between the two
surplus nations such as Japan, Switzerland, Canada and
                                                                                                    countries − trade, not CNY. Second, I suspect a re-iteration
Euroland should be supported, ceteris paribus.
                                                                                                    by China of its policy to continue to reform its monetary and
• Question 2. What do I think is the Fed’s stance?                                                  exchange systems may be enough for the US Treasury not to
I have the following thoughts. First, when the Fed                                                  name China as a currency manipulator in the upcoming
communicates with the market, it conveys information about                                          report. Third, S. 2467 proposed by Senators Grassley and
two moments: the ‘mean’ and the ‘variance’ of the likely FFR                                        Baucus could potentially help prevent trade and currency-
trajectory. From early-2004 until the end of 2005, the Fed                                          related issues from being politicized, as has been the case
essentially told the market two things: (i) the ‘mean’ of the                                       with CNY. Fourth, European countries no longer support the
FFR trajectory would show a gradual but positive slope and                                          US’ hard-line approach toward China regarding CNY. This
(ii) the ‘variance’ of the FFR trajectory would be very modest.                                     means that China will likely not be singled out in the next G7
Since late-2005, however, the Fed has changed its message:                                          Communiqué. Putting all these together, while support for
(i) the ‘mean’ of the FFR is flattening, as the Fed is close to                                     protectionism may still be entrenched on Capitol Hill, the CNY
pausing and (ii) the ‘variance’ will rise because the Fed is now                                    debate will most likely not intensify, and the pendulum may
more data-dependent, as it will do whatever is appropriate                                          actually start to swing in the other direction. What this means
given the evolution of data.                                                                        for CNY is that Beijing will be able to guide it stronger at its
                                                                                                    own pace, without the political pressures from the US.
The FFR is probably approaching a level that is consistent
with growth converging to the potential rate of growth. The                                         • Question 4. Will the US Treasury adopt a weak dollar
risk to inflation is still slightly biased to the upside. Thus                                      policy? No. There is still talk in the market about the risk of
another hike on May 10 to 5.00% makes sense. However,                                               the Bush Administration, taking the opportunity of a
further rate action may not be compelling, based on the                                             prospective Cabinet reshuffle involving Secretary Snow to
current information. In addition, as the Fed is now data-                                           replace the current strong dollar policy with a weak dollar
dependent, if the economy continues to perform as well as we                                        policy. As I have argued before, this is highly unlikely as it is
expect, it is quite likely that the Fed will resume tightening at                                   a dangerous policy with uncertain benefits. If an investor
some point, if it pauses after May 10. While the Fed will not                                       wants to establish a short-USD position, he/she need not use
react to every wiggle in the economic data, it could stop,                                          this argument, or fears of wholesale diversification, as a
pause, or resume tightening, depending on the evolution of                                          justification. The dollar will likely weaken, due to cyclical
the data.1 This is the ‘variance’ point I made above.                                               reasons. But if investors convince themselves that a weak
                                                                                                    dollar policy will be adopted or that the Asian and Middle
The press reports these days are filled with declarations that
                                                                                                    Eastern central banks will aggressively diversify away from
the Fed will ‘stop’. But the Fed will never ‘stop’, it will always
                                                                                                    dollars, then there could be the risk of investors getting caught
assess and act. Even keeping the FFR unchanged is an
                                                                                                    with short-dollar positions at under-valued levels, like in late-
explicit ‘act.’ The market’s focus on when the Fed will
                                                                                                    2004.
complete its tightening campaign is mis-placed. Rather,
investors should focus on the evolution of the Fed’s forecasts.
                                                                                                    Bottom Line
Both policy lags and the assumed future policy path are
reflected in the outlook. Thus, the Fed’s outlook is the key                                        Holding a short-dollar position is sensible, as I continue to
thing to watch.                                                                                     expect the USD to weaken this year due to cyclical reasons.
                                                                                                    But I still believe long-EUR/USD is the low-quality trade that is
In any case, the increased ‘variance’ in the FFR profile could
                                                                                                    based more on speculation (e.g., diversification) rather than
also contribute to the elevated US long bond yield.
                                                                                                    fundamentals, while short-USD/Asia is the higher-quality
                                                                                                    trade, as the fundamentals are more compelling.

1
    After two years of extraordinarily stable GDP growth of around 3.5% a quarter, we could be
    entering a period where there might be a bit more volatility in output growth, reflecting
    energy and weather shocks. However, with the flattened Phillips Curve, inflation is likely to
    remain more stable/docile than output.


See additional important disclosures at the end of this material.                                                                                                  6
                                                                                               MORGAN STANLEY FIXED INCOME RESEARCH

                                                                                               April 20, 2006
                                                                                               FX Pulse
                                                                                               Oil Slick




USD: GCC’s Monetary Union and the Dollar
Stephen Jen
                                                                                               Background Information on the Gulf Monetary
                                                                                               Union
      • Under the proposed currency union, GCC countries will
        probably keep their USD-pegged foreign exchange policy.                                The GCC was formed on May 25, 1981, to facilitate policy
        Also, we should not experience a wholesale diversification of                          coordination and integration among its six member countries
        reserve away from USD to EUR.                                                          (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United
                                                                                               Arab Emirates).2 During a summit meeting in December
                                                                                               2001, the member countries decided to, by January 1, 2010,
The Impact on the USD Likely to Be Minimal                                                     establish a monetary union with a single currency pegged to
The Gulf Cooperative Council (GCC) has been working with                                       the USD. (For my discussion here, I will henceforth refer to
the ECB on implementation issues regarding their intention to                                  this prospective regional currency as the ‘Gulf dinar’.) In the
form a monetary union by 2010. As a result, there is                                           interim, the member countries are committed to maintaining
speculation that the EUR may play a more prominent role in                                     hard pegs to the USD.
the region’s reserve policy.1 In this note, I dispute this                                     The justifications for such a monetary union are not
speculation, and argue that the USD should not be affected                                     surprising. First, complemented by a customs union, such a
by this discussion, at least not in the next few years. The                                    union would enhance the regionalization of trade and financial
GCC countries have already benefited from being on a USD                                       activities. From the microeconomic perspective, the
standard, because of its intense reliance on goods (oil and                                    elimination of currency translation costs and uncertainties
gas) that are priced in USD. They have also committed to                                       should, in theory, enhance intra-regional trade and
locking the regional currency to the USD by 2010. Deviating                                    investment, and competition. Second, having a more liquid
from such a path has unclear economy benefits but clear                                        regional currency should enhance the development of a
credibility costs, in my view.                                                                 regional capital market. Third, unlike in the EMU, the shocks
While the GCC countries’ imports from Euroland have indeed                                     that are most likely to impinge on the member countries are
been rising, their exports to Asia (mostly USD-denominated)                                    symmetrical, in light of the dominance of the oil and gas
have also risen sharply. The net effect does not appear to be                                  industries. Thus, these countries can benefit from a common
powerful enough for them to consider either: (i) altering the                                  monetary authority. Fourth, with greater capital mobility and
exchange rate arrangement before 2010; or (ii) adopting a                                      still weak financial systems, regionalizing the monetary and
USD-EUR weighted basket as the peg of the new regional                                         exchange rate regimes could help shelter these economies
currency. If I am right, the currency composition of the official                              from speculative attacks.
reserves or the investment funds of these member countries                                     Prior to 2002, with the exception of Kuwait, which had pegged
should not change drastically, and they will remain USD-                                       its currency (Kuwaiti dinar) to the IMF’s SDR (Special Drawing
centric, as they have been for the past decades.                                               Right, which is a composite currency consisting of the G4
GCC countries may manage their investments like any other                                      currencies), all the GCC members already had USD pegs in
country, properly reacting to the changing cyclical                                            practice.3 The USD was chosen as the nominal anchor both
fundamentals of the various economies and markets.                                             during the interim period and in 2010 primarily because such
Structural wholesale adjustments in currency exposure away                                     a bilateral peg has served these countries well in past
from USD toward EUR are unlikely, in my view. Structural                                       decades.
diversification from the G3 markets to the non-G3 space and                                    As Exhibit 1 shows, the GCC countries had a combined GDP
from sovereign bonds to higher-return, higher-risk assets has                                  of about USD 600 billion as of 2004 − roughly the size of the
indeed been taking place in most central banks and public                                      GDP of Australia. While their collective official reserves are
investment funds. The prevalent market view that
diversification is a ‘USD versus EUR’ story is erroneous, in my                                2
                                                                                                   These six countries form a contiguous chain bordering on the Arabian Gulf; their peoples
view.                                                                                          3
                                                                                                   share a similar culture and one language.
                                                                                                   There is a difference between de jure and the de facto pegs that these countries had in the
                                                                                                   last three decades. With the exception of the rial Omani, which was both de jure and de
                                                                                                   facto pegged to the USD, all the other currencies were de jure pegged to the SDR, but de
1
    ECB to Advise Gulf States on Monetary Union, by Ralph Atkins, Financial Times, April 17,       facto pegged to the USD, because of the high implied weight on the USD, except for the
    2006.                                                                                          Kuwaiti dinar, as I mentioned in the main text.


See additional important disclosures at the end of this report.                                                                                                                             7
                                                                                               MORGAN STANLEY FIXED INCOME RESEARCH

                                                                                               April 20, 2006
                                                                                               FX Pulse
                                                                                               Oil Slick




‘only’ USD63 billion, most of their foreign asset holdings are                                 In addition to exports being dominated by a commodity that is
managed by public fund management arms and are                                                 priced in USD, GCC members’ tax revenues are also heavily
substantially larger than this figure.                                                         influenced by the oil sector, and therefore linked to the USD.
                                                                                               Specifically, oil revenues − priced in USD − account for 92%
The key question is, will the GCC countries turn less USD-
                                                                                               of government revenues in Kuwait, 81% in Saudi Arabia, 77%
centric either in the near future or in 2010, when they may
                                                                                               in Oman, 76% in the UAE, 74% in Bahrain and 56% in Qatar.7
decide, for the ‘Gulf dinar’, not to adopt a USD peg but a
basket peg that includes the EUR.                                                              Thus, with the current fundamentals, GCC members should
                                                                                               opt to maintain their USD pegs now, and at the initial stages
I Don’t Believe that the GCC Will Turn Less USD-                                               of the monetary union in 2010.
Centric
                                                                                               • Thought 2. Rising European presence will likely be
Here are my thoughts:                                                                          glacial and modest. Having said the above, with intensifying
                                                                                               trade with Europe, a future shift to also include the EUR as
• Thought 1. Oil will continue to be invoiced in USD. An
                                                                                               part of the peg for the ‘Gulf dinar’ after 2010 should not be
important consideration in deciding on the anchor currency for
                                                                                               excluded as an option. My own guess is that, although this
a regional monetary union is whether such a peg minimizes
                                                                                               trend is genuine, it will be quite glacial and modest, and not
exchange rate volatility for the member countries. The other
                                                                                               strong enough to justify including EUR as part of a basket peg
consideration is competitiveness: could a hard USD peg
                                                                                               for the ‘Gulf dinar’. Structural USD bears have made the point
compromise GCC members’ export competitiveness?
                                                                                               that rising imports from Europe will ultimately alter the
Specifically, because oil exports are denominated and mostly                                   currency allocation of foreign reserves in favor of the EUR
settled in USD, a USD peg helps to eliminate currency risk                                     against the USD. It is true that GCC and other Middle
and therefore should facilitate the stabilization of oil exporters’                            Eastern countries have, in recent years, exhibited a high
USD-dominated financial wealth. Even though GCC member                                         propensity to import from European countries (Exhibit 2
countries have made strong efforts to diversify from the                                       shows a distinct increase in the share of imports of these
energy sector, about three-quarters of their export receipts                                   countries from Europe in recent years). At the same time,
and government revenues are still directly related to the oil                                  there has been a slight decline in exports to Europe and a
and gas industries (see Exhibit 1).                                                            sharp increase in exports to Asia ex-Japan. Most of these
                                                                                               exports are oil-related, and thus are invoiced in USD. AXJ
On the other hand, a more flexible exchange rate regime may
                                                                                               buyers are likely to settle these oil imports in USD as well.
better preserve export competitiveness for the non-oil sectors,
                                                                                               Thus, what we have is a near-90% of export receipts in USD
particularly for the member countries that are running out of
                                                                                               and only 65-70% of import payments in USD. Furthermore,
oil reserves, such as Bahrain and Oman,4 and other countries
                                                                                               these two ratios are diverging gradually.
that are making a strong effort to diversify out of oil and gas.
Either a basket peg or a managed floating regime, vis-à-vis                                    There are several observations to make here. First, the GCC
the majors, may be more appropriate for the ‘Gulf dinar’.                                      countries, as a whole, will need to continuously sell USD and
                                                                                               buy EUR. Thus, if we hear of EUR/USD buy orders from
The net effect of the trade-offs between exchange rate
                                                                                               Middle Eastern names, we should not be alarmed or think that
stability and export competitiveness is a question that should
                                                                                               that implies that a stampede out of USD is imminent. Second,
be answered empirically. Two empirical studies have arrived
                                                                                               I am guessing that the share of USD in the Middle Eastern
at the same conclusion: the GCC countries are better off
                                                                                               funds (official reserves and petroleum funds) should be 65%
staying with the simple peg to the USD, primarily because of
                                                                                               or higher. 65% happens to be the global average USD
the dominance of the oil and gas sectors in their collective
                                                                                               holdings, and the rough ratio for the Asian central banks. In
economies and the fact that GCC trade is sensitive to the
                                                                                               other words, I believe that oil exporters are at least as USD-
USD but not sensitive to the EUR.5,6
                                                                                               centric as the Asian central banks. Third, given the appetite
                                                                                               for European products, I do think that there will be a gradual
                                                                                               move in reserves toward the EUR, away from the USD. But I
4
  G. Abed, S. Erbas, and B. Guerami, (2003), The GCC Monetary Union: Some                      stress that this move will be very gradual and modest
  Considerations for the Exchange Rate Regime, IMF Working Paper, WP/03/66, April.
5
  Abed et al. (2003) and S. Erbas, Z. Iqbal, and C. Sayers, (2001), External Stability Under
                                                                                               because, in absolute terms, GCC (or the Middle East)
  Alternative Nominal Exchange Rate Anchors: An Application to the Gulf Cooperative
  Council Countries, Macroeconomic Issues and Policies in the Middle East and North Africa,
  International Monetary Fund.
6                                                                                              7
  Abed et al. conclude that their trade elasticity estimates for the USD are statistically         Kalid Al-Bassam, (2003), The Gulf Cooperation Council Monetary Union: A Bahraini
  significant but statistically insignificant for the EUR. This suggests that there are no         Perspective, in Regional Currency Areas and the Use of Foreign Currencies, BIS Papers
  meaningful gains to including EUR in the peg.                                                    No 17.




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                                                                                          MORGAN STANLEY FIXED INCOME RESEARCH

                                                                                          April 20, 2006
                                                                                          FX Pulse
                                                                                          Oil Slick




countries don’t import a lot. For Saudi Arabia, for example,                              weak. Most of the GCC countries are running C/A surpluses
total imports in 2005 were only around USD 56 billion, about a                            close to 30% of GDP. If S. 2467 by Senators Grassley and
third of its total exports. If 30% of the imports came from                               Baucus is passed, it will be difficult to justify that the ‘Gulf
Europe, and assuming that all of these are settled in EUR                                 dinar’ is not mis-aligned. It is not clear to me at this point how
(which is a strong assumption), there would only be the need                              this issue will evolve over the coming years.
for Saudi Arabia to buy USD 16 billion or so of EUR all year,
versus USD 150 billion in USD receipts. Thus, the GCC                                     Bottom Line
countries importing a bigger share from Europe will not have a
                                                                                          The issue of how the planned GCC monetary union would
huge impact on how they manage their reserves or
                                                                                          affect the USD is an important one, as it raises questions
investments, in my view.
                                                                                          regarding the recycling of the petrodollars. I am of the view
• Thought 3. How does the US feel about USD pegs?                                         that: (i) the GCC will opt for a clean USD peg, not a basket
Historically, US policy makers (at both the US Treasury and                               peg involving the EUR; and (ii) the GCC, and other oil
the Federal Reserve) have not objected to or encouraged                                   exporters, are likely to be at least as USD-centric as the Asian
other countries to adopt USD pegs or ‘dollarize’ their                                    central banks in their foreign reserve and investment holdings,
economies. However, in light of the large US C/A deficit, and                             i.e., more than 65% of their foreign asset holdings will remain
the political fixation on China’s CNY, I am least comfortable                             in USD. Wholesale diversification away from USD into EUR
with this aspect of the question at hand: will the US object to                           by oil exporters does not make sense, and is therefore highly
the GCC pegging to the USD at a rate that is considered too                               unlikely to take place, in my view.

Exhibit 1
Basic Statistics of the GCC Countries, 2004
                                   Nominal GDP            Population     GDP per capita      Total exports           Oil exports          Oil exports           Reserves
                                      (USD bn)              (million)            (USD)           (USD bn)              (USD bn)           (% of total)           (USD m)
Bahrain                                     12.9                 0.8            14,176               13.5                    na                    na            1,742.3
Kuwait                                      74.6                2.87            26,020               25.5                 21.40                83.9%             9,155.5
Oman                                        30.3                2.43            12,495               12.8                 13.70               107.0%             4,245.1
Qatar                                       37.9                 0.8            47,519               18.5                  8.21                44.4%             4,456.5
Saudi Arabia                               307.8               23.11            13,316              112.6                 91.29                81.1%            20,870.0
UAE                                        133.8                4.68            28,582                 67                 32.85                49.0%            22,586.3
Source: IMF, OPEC, Morgan Stanley Research


Exhibit 2
GCC Countries’ Directions of Trade (% of Total)
Exports                             United States                  EU                Japan                    Asia                   Africa              Middle East
                                    2000           2004     2000        2004      2000       2004          2000      2004          2000       2004       2000          2004
Bahrain                              4.1            2.9      4.9         2.9       2.8        1.9          14.5        7.8          3.7         3.5       6.5           9.3
Kuwait                              14.4           12.5     13.8         9.9      24.1       20.5          42.8       52.1          1.0         0.8       2.1           3.8
Oman                                 1.2            3.2      1.3         3.2      18.2       11.5          62.9       65.2          1.5         0.9      13.6          14.8
Qatar                                3.1            1.3      1.0         2.7      45.0       41.9          31.7       37.8          0.8         1.0       6.2           6.1
Saudi Arabia                        17.4           18.2     17.7        16.4      17.3       14.9          31.7       32.7          4.5         4.5       6.3           9.3
UAE                                  2.2            1.6      5.1         8.4      33.2       24.9          30.3       32.7          3.0         3.2       9.7          11.4


Imports                             United States                  EU                Japan                    Asia                   Africa              Middle East
                                    2000           2004     2000        2004      2000       2004          2000      2004          2000       2004       2000          2004
Bahrain                             12.8            5.6     25.8        27.6       4.0        7.3          14.0       11.1          0.6         0.6      34.9          39.0
Kuwait                              12.1           12.9     32.8        37.1       8.7        8.0          18.5       16.1          0.5         0.5      19.8          15.6
Oman                                 5.4            4.7     19.3        29.1      18.1       16.6          14.6       12.4          0.4         0.6      35.2          29.4
Qatar                               10.3            9.5     35.4        45.5      11.0        5.2          18.1       12.3          0.3         0.5      17.4          20.1
Saudi Arabia                        19.3           15.3     30.1        31.1      10.4        9.8          17.0       18.9          1.7         2.1       5.9           8.4
UAE                                  7.9            6.0     37.2        33.2       9.6        6.8          29.7       37.6          1.1         1.4       7.5           5.7
Source: IMF’s Direction of Trade




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                                                                    MORGAN STANLEY FIXED INCOME RESEARCH

                                                                    April 20, 2006
                                                                    FX Pulse
                                                                    Oil Slick




G10: Reserved Reserve Banks
Laura Ambroseno                                                     The different interpretations about the global outlook may
                                                                    seem at odds with each other. However, the difference could
   • Asset markets are sanguine while central banks remain          be explained two ways. First, the sanguine central bank
     reserved about future global growth.                           approach poses less risk of overtightening, thus keeping
                                                                    future global growth on track. Alternatively, the sanguine
   • At this point in the cycle, currency momentum trades are not
                                                                    central bank approach is causing inflation expectations to rise,
     lucrative in our view, and we prefer staying in the crosses.
                                                                    which is initially positive for real assets such as equities. The
                                                                    32 bps rise in the 10 year UST was driven roughly half by real
                                                                    yields and half by nominal yields, suggesting both theories are
Asset Markets Are Sanguine
                                                                    at work.
Risky assets are outperforming across the board.
Commodities prices are the most obvious example of market           Currency Implications
optimism. Oil prices have risen back to pre-Katrina levels,
                                                                    USD and JPY were worst the performing major currencies
with the near-dated WTI contract rising decisively over $70
                                                                    since the 27 March FOMC meeting, with USD losses
per barrel. Certainly supply conditions as well as demand
                                                                    accelerating after the minutes release on 18 April enough to
conditions have supported oil related commodity prices.
                                                                    push the trade weighted USD through ranges established
Disruption concerns related to political issues in Iran and
                                                                    over the last two months. Thus, the USD largely ignored the
Nigeria just as the summer driving season approaches have
                                                                    pricing in, then back out of a higher terminal funds rate.
made the headlines.
                                                                    This behavior seems consistent with our idea that USD will
However, most other commodities sensitive to economic
                                                                    weaken this year as the tightening cycle comes to an end.
conditions are also making new highs. The Commodities
                                                                    However, we feel a major sell-off is not warranted, despite the
Research Bureau’s spot index, which excludes energy-related
                                                                    recent renewed focus on global imbalances. Our bias is that
commodities, has risen 2.7% since 27 March after trading
                                                                    the global economy is indeed shifting towards a more
sideways for nearly two months prior. The CRB precious
                                                                    sustainable growth path and eventually risk assets and
metal futures index also surged to new highs, led by gold
                                                                    currencies will come to reflect this. In the meantime, currency
pushing through $600 per ounce. Risk appetite is evident in
                                                                    calls have been particularly difficult as the moment does not
other markets as well, with global equities pushing to new
                                                                    seem right for momentum trades. As such, we remain focused
highs and emerging market spreads holding steady despite
                                                                    on cross-trades and await at least the passing of this week-
the sharp backup in global risk-free yields.
                                                                    end’s G7 event risk to reevaluate.
Recent price action appears to have a common factor – the
                                                                    Exhibit 1
rally refueled on the 28 March FOMC statement that was
                                                                    Regional Currency Returns Since 27 April FOMC
interpreted as Fed desire to take the terminal funds rate
above 5% in a shorter period than previously expected.                5%
                                                                      4%
Central Banks Are Reserved
                                                                      3%
Meanwhile, central banks are looking beyond the boom. The
                                                                      2%
minutes of the March 28 FOMC meeting revealed a more
dovish committee, that mostly thought the “end of the                 1%
tightening process was likely to be near” and is now in “data-        0%
surprise-dependent” mode. The ECB and BoJ are further
                                                                     -1%
behind in the tightening process but are also taking a relaxed
approach. The ECB is concerned about inflation pressures,            -2%
but its slow pace suggests perhaps the impact of high energy                     EE       Core EU       $ bloc   LA   AXJ    JPY
prices on growth, rather than prices, is a bigger concern – one     Source: Morgan Stanley, Bloomberg
also shared by our economists.


See additional important disclosures at the end of this material.                                                                  10
                                                                         MORGAN STANLEY FIXED INCOME RESEARCH

                                                                         April 20, 2006
                                                                         FX Pulse
                                                                         Oil Slick




USD: G7 Concerted Concerns
Laura Ambroseno                                                           the time, and changes in USD/JPY over the week prior and
                                                                          the week after the G7 meetings. A summary appears in
   • Global imbalances and currency levels have been                      Exhibit 2. We make the following observations:
     highlighted ahead of the G7 this week. We do not think this
                                                                          - USD/JPY trending higher above ¥120 has brought warnings
     is the time for concerted concern.
                                                                            about excessive depreciation/volatility.

                                                                          - USD/JPY below ¥110 has brought support for Japanese
G7 Focus on Exchange Rates                                                  concern for JPY strength, but no blanket warnings.

The G7 meeting this weekend was shaping up to be a non-                   - Given the unique circumstances surrounding each period, it
event for foreign exchange as the CNY flexibility issue has                 is hard to distinguish a pattern in price movements before
faded to the background of late. However, three events this                 and after G7 meetings.
week may bring the general exchange rate to the fore again:
                                                                          - While nominal USD/JPY is not near the highs reached in the
1) The FOMC minutes for the 27 March meeting were                           last two periods of G7 commentary about monitoring
interpreted as being “dovish,” with the Fed very close to the               exchange rate movements, the real effective exchange rate
end of the tightening cycle. The result appears to be a shift               for JPY is lower than in either 97-98 or 01-02. See Exhibit 1.
away from nominal interest rate differentials as a driver of
currency returns towards renewed focus on the imbalance                   Not the Time for Concerted Concern
correction story. It is difficult to tell whether this will last, but,
                                                                          We do not believe exchange rates are at extremes that
combined with the following two events, it has shifted market
                                                                          would provoke a concerted G7 effort to weaken USD,
sentiment.
                                                                          as nominal exchange rates do not appear to be at extremes,
2) The IMF released its quarterly world economic outlook                  no economy is suffering from an exchange rate
report (WEO) on Wednesday and noted that “adjustment in                   misalignment, and it does not really seem to be in the best
(global) imbalances will in all circumstances require both a              interest of G7 participants to push for a USD correction.
significant rebalancing of demand across countries, and a
                                                                          As such, we do not expect the statement to go beyond the
further substantial depreciation of the dollar and appreciation
                                                                          typical, “We reaffirm that exchange rates should reflect
of surplus countries, notably in parts of Asia and oil
                                                                          economic fundamentals. We continue to monitor exchange
producers; the issue is when and how those adjustments will
                                                                          markets closely and cooperate as appropriate.”
occur.” IMF Chief Rato followed up by saying the Fund
                                                                          Nonetheless, current market sentiment suggests USD would
needed to improve surveillance of the global economy and
                                                                          be vulnerable to any indications that the FX focus is no
produce analysis on exchange rates.
                                                                          longer on CNY, but on general currency market conditions.
3) Fed Chairman Bernanke responded to questions posed by
                                                                          Exhibit 1
Congressman Sherman about a possible realignment of
                                                                          JPY: Real Narrow Effective Exchange Rate
USD to help adjust the US trade deficit. The chairman was
very balanced in his views, but did end by writing, “Although              140

U.S. trade deficits cannot continue to widen forever, these
                                                                           120
deficits need not engender a precipitous decline in the dollar,
nor should such a decline, were it to occur, necessarily                   100
disrupt financial markets, production, or employment.”
                                                                            80
These events have started to refocus interest in the G7
meeting away from calls for China to render its exchange                    60
rate more flexible, to the possibility of a more general call for
currency realignments. USD/JPY tends to be an obvious                       40
focus of attention of currency imbalances. As such, we                       Jan-75       Jan-80     Jan-85      Jan-90       Jan-95      Jan-00       Jan-05

analyzed previous G7 statements, the levels of USD/JPY at                 Source: Morgan Stanley Research, Bank for International Settlements, Haver



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                                                                    April 20, 2006
                                                                    FX Pulse
                                                                    Oil Slick




Exhibit 2
G7 Finance Minister Meetings and USD/JPY Behaviour
                                  USD/JPY return   USD/JPY return
Date                                week before        week after    USD/JPY level                  G7 Sentiment on FX

8-Feb-1997                                2.52%            -0.27%            121.35
27-Apr-1997                               -0.14%           0.75%             125.80              Warnings against excessive
20-Sep-1997                               -0.22%           -0.49%            121.55        volatility and depreciation as USD/JPY
                                                                                                         moved higher.
24-Dec-1997                               -0.65%           -0.27%            127.15
21-Feb-1998                               1.72%            0.92%             125.20
Average (%)                               0.65%            0.13%
Volatility (%)                            1.39%            0.65%
8,9-May-1998                              0.85%            0.61%             133.24
14-Sep-1998                               -2.38%           -0.29%            134.40
3-Oct-1998                                -0.40%         -12.25%             134.50         Collapse of USD/JPY after 145 peak
20-Feb-1999                               5.33%            -0.87%            114.24          Avoid excess volatility and promote
26-Apr-1999                               1.09%            0.87%             117.93                 sound fundamentals
11,12-Jun-1999                            -2.21%           2.16%             121.52
25-Sep-1999                               -2.25%           0.84%             106.64         Acknowledgement of Japan concern
1-Feb-2000                                0.91%            1.65%             105.81                 for JPY strength
16-Apr-2000                               -0.19%           0.66%             109.69
8-Jul-2000                                0.00%            2.24%             105.71
23-Sep-2000                               -0.01%           0.79%             107.43          EUR/USD intervention below 0.85
17-Feb-2001                               -1.85%           0.69%             117.74
28-Apr-2001                               1.24%            -2.18%            121.47        Monitor exchange rates and cooperate
7-Jul-2001                                1.18%            -0.71%            124.39        as appropriate as USD/JPY moved to
                                                                                                     new cyclical highs
6-Oct-2001                                0.88%            0.54%             119.19
8,9-Feb-2002                              0.13%            -1.32%            133.96
Average (%)                               0.32%            -0.60%
Volatility (%)                            1.29%            1.22%
19,20-Apr-2002                            -1.19%           -1.86%            131.44
14,15-Jun-2002                            0.60%            1.99%             124.35
27-Apr-2002                               1.17%            -0.07%            121.22
                                                                                            Comfort zone 120-130, no comments
21,22-Feb-2003                            -1.94%           -0.45%            120.42
11,12-Apr-2003                            0.15%            -0.58%            119.99
16,17-May-2003                            -0.24%           0.86%             117.30
20-Sep-2003                               -2.47%           -2.29%            117.35
6,7-Feb-2004                              -0.27%           -0.21%            105.75
23,24-Apr-2004                            0.93%            1.03%             108.32
22,23-May-2004                            -1.84%           -1.35%            114.12
1-Oct-2004                                0.07%            -0.36%            110.33        Monitor exchange rates and cooperate
4,5-Feb-2005                              1.18%            2.04%             103.38        as appropriate; focus on more flexibility
                                                                                                  (CNY comes into focus)
15,16-Apr-2005                            0.06%            -1.94%            108.27
21-Jul-2005                               0.92%            1.44%             111.84
23-Sep-2005                               1.18%            1.33%             110.31
2,3-Dec-2005                              0.24%            -0.54%            118.84
10,11-Feb-2006                            -0.07%           1.16%             118.56
22-Apr-2006                               -0.88%              ??             117.59   Will the G7 refocus on general global imbalances?


Average – all (%)                         0.18%            -0.10%
Volatility – all (%)                      1.46%            2.25%
Source: Morgan Stanley Research




See additional important disclosures at the end of this material.                                                                         12
                                                                   MORGAN STANLEY FIXED INCOME RESEARCH

                                                                   April 20, 2006
                                                                   FX Pulse
                                                                   Oil Slick




SKK: Staying Konvergence-Konstructive
Gyula Pleschinger                                                   its inflation goals without seriously risking a delay in euro
                                                                    adoption. Current monetary conditions are likely to be neutral
   • We continue to like SKK on a fundamental basis and             at best. February’s 50 bp tightening and the mild SKK
     highlight the currency’s resistance in the recent sell-off     appreciation in the last quarter was likely insufficient to
                                                                    significantly tighten historically loose monetary conditions
   • Local politics and loose monetary conditions are still a
                                                                    (Exhibit 1). Therefore we expect the MPC to deliver another
     concern, but with a potential to deliver positive surprises
                                                                    50 bp rate hike on Tuesday (April 25), moving policy rates to
                                                                    4%. Since market valuations currently imply only a full 25 bp
                                                                    tightening, we see scope for SKK appreciation on the back of
Supported by Fundamentals…
                                                                    this move. Should the Council decide not to hike rates,
We continue to like SKK on a long-term valuation basis and          however – preferring to stay on the sidelines in the run-up to
expect the most ambitious and transparent euro-adoption             elections, for example – the inflation overshoot will likely be
program among the CE4 countries to support the currency in          even more severe, which would eventually force us to reduce
the coming months. We maintain our optimistic 36.75 target          our short EUR/SKK positions.
for the next two months with a bullish bias. SKK appreciation,
in our view, is fundamentally underpinned by the strongest          …with Political Risk on Hold for Now
economic growth in the region, the positive outlook for
                                                                    With populist Smer party well ahead in opinion polls, a
exports, and the likely re-acceleration of FDI inflows, which –
                                                                    market-unfriendly shift in local politics is still the most likely
coupled with short-term foreign lending – is expected to
                                                                    scenario after elections (June 17). Smer leader Fico’s
comfortably finance the wide current account deficit.
                                                                    obscure comments about the euro did little to convince
According to our economists’ interest rate forecast, the SKK
                                                                    investors that key achievements of the outgoing reformist
will offer the second highest carry in the region behind the
                                                                    government will be preserved. That said, we don’t think it is
HUF by the end of Q2.
                                                                    time to cut long SKK positions due to politics. Even if the
SKK price action over the past months proved that investors’        Smer party wins, it will likely need to seek the support of
confidence in the positive currency outlook remained largely        some of the reformist parties, which will limit the room for
intact. Despite the market’s heavily constructive positioning       populist policy-making, in our view. In addition to that, Smer
SKK losses were limited during the global EM shakeout in            gave up a similarly convincing lead four years ago and this
March. At the climax of the sell-off the currency was only          may well happen again if electorate eventually decides to
2.3% weaker than the historically strongest levels seen at the      reward PM Dzurinda for his better political skills (compared
end of February (as opposed to 6% and 8% losses suffered            to Fico) and for his government’s achievements.
by the more vulnerable PLN and HUF, respectively; CZK
                                                                    Exhibit 1
outperformed SKK by 0.3%). With recent global risk-aversion
                                                                    NBS Real Monetary Conditions Index – Still Loose?
fading, we witnessed SKK outperformance versus the rest of
CE4 re-emerging over the past couple of trading sessions.               2
                                                                                         Output Gap               Tight Monetary Conditions
                                                                       1.5
We continue to see a populist shift in local politics and a                              RMCI
                                                                        1
hesitant central bank as the key risks to our constructive
                                                                       0.5
view, but we argue that both factors have the potential to
                                                                        0
surprise on the currency-supportive side.
                                                                      -0.5

                                                                        -1
…and Likely Rising Interest Rates…
                                                                      -1.5

A recent spike in inflation raised concerns over a possible             -2
slippage in Slovakia’s ambitious euro entry target (January 1,        -2.5
                                                                                                                                  Loose Monetary Conditions

2009). Indeed, CPI readings near 4.5% are far away from the
                                                                              1


                                                                                     2


                                                                                              3


                                                                                                       4


                                                                                                              1


                                                                                                                       2


                                                                                                                              3


                                                                                                                                       4


                                                                                                                                               1


                                                                                                                                                      2


                                                                                                                                                             3


                                                                                                                                                                    4
                                                                             Q


                                                                                    Q


                                                                                             Q


                                                                                                      Q


                                                                                                             Q


                                                                                                                      Q


                                                                                                                             Q


                                                                                                                                      Q


                                                                                                                                              Q


                                                                                                                                                     Q


                                                                                                                                                            Q


                                                                                                                                                                   Q
                                                                         03


                                                                                    03


                                                                                            03


                                                                                                    03


                                                                                                             04


                                                                                                                     04


                                                                                                                             04


                                                                                                                                    04


                                                                                                                                             05


                                                                                                                                                     05


                                                                                                                                                            05


                                                                                                                                                                   05




NBS’s 2.5% ceiling for end-2006 and an overshoot now
                                                                       20


                                                                                  20


                                                                                          20


                                                                                                  20


                                                                                                           20


                                                                                                                   20


                                                                                                                           20


                                                                                                                                  20


                                                                                                                                           20


                                                                                                                                                   20


                                                                                                                                                          20


                                                                                                                                                                 20




looks very likely. We believe the Bank has little room to miss        Source: National Bank of Slovakia.



See additional important disclosures at the end of this material.                                                                                                       13
                                                                                                       MORGAN STANLEY FIXED INCOME RESEARCH

                                                                                                       April 20, 2006
                                                                                                       FX Pulse
                                                                                                       Oil Slick




Macro Forecast Corner
Sharon Yeshaya

GDP Forecasts* (changes from prior week in bold)
                                                               (Y%) 2005                    2006      2007           Q4 05          Q1 06          Q2 06         Q3 06         Q4 06         Q1 07
US                  Morgan Stanley (10 Apr)                         3.5%A               3.5%           3.2%         1.7%A            4.5%           3.6%          3.7%          3.8%          3.0%
                    Consensus (13 Mar)**                                                3.3%           3.0%                          3.4%           3.4%          3.2%          3.5%          3.0%
                    Govt CBO (26 Jan)                                                   3.6%           3.4%
                    Fed (15 Feb)                                                        3.5%       3.0-3.5%
Eurozone            Morgan Stanley (2 Mar)                          1.4%A               2.1%           1.6%         0.3%A            0.6%          0.5%          0.6%           0.7%         -0.1%
                    Consensus (13 Mar)**                                                2.1%           1.8%                          0.6%          0.5%          0.5%           0.6%          0.3%
                    EU Commission (21 Feb)***                                           1.9%           2.1%                      0.4-0.9%      0.4-0.9%      0.4-0.9%
                    ECB (2 Mar)                                                     1.7-2.5%       1.5-2.5%
Germany             Morgan Stanley (14 Feb)                         0.9%A               1.8%           0.8%         0.0%A            0.6%           0.4%          0.7%          1.2%         -0.8%
                    Consensus (13 Mar)**                                                1.7%           1.0%                          0.6%           0.5%          0.5%          0.6%         -0.3%
                    EU Commission (21 Feb)                                              1.5%           1.6%
                    Govt (Jan 26)                                                       1.4%
Japan               Morgan Stanley (13 Mar) – CY                    2.7%A               3.2%          2.3%          1.3%A            0.7%           0.8%          0.5%          0.6%          0.7%
                    Consensus (13 Mar)** – CY                                           2.9%          2.1%                           0.6%           0.7%          0.5%          0.4%          0.7%
                    Govt Cabinet Office (18 Jan) – FY                                   1.9%          1.8%
                    BoJ (31 Oct) – FY                                               1.6-2.2%
UK                  Morgan Stanley (12 Apr)                         1.8%A               2.3%           2.6%         0.6%A            0.6%           0.6%         0.6%           0.6%          0.6%
                    Consensus (13 Mar)**                                                2.2%           2.5%                          0.6%           0.5%         0.6 %          0.7%          0.6%
                    Govt (19 Apr)                                                   2.0-2.5%       2.7-3.2%
                    BoE (15 Feb)                                                        2.6%           3.0%
Switzerland         Morgan Stanley (12 Apr)                         1.9%A               2.1%           1.7%
                    Consensus (13 Mar)**                                                2.1%           1.7%         0.5%A            0.3%           0.7%          0.5%          0.6%          0.1%
                    Govt (30 Mar)                                                       2.0%           1.5%
                    SNB (16 Mar)                                                        2.0%
Sweden              Morgan Stanley (2 Mar)                          2.7%A               3.5%          2.8%          0.7%A            1.1%           1.0%          0.8%          0.7%          0.7%
                    Consensus (13 Mar)**                                                3.3%          2.6%                           1.0%           0.7%          0.7%          0.4%          0.8%
                    Govt (18 Apr)                                                       3.6%          3.0%
                    Riksbank (23 Feb)                                                   3.5%          2.8%
Canada              Morgan Stanley (23 Feb)                         2.9%A               3.1%          2.8%
                    Consensus (13 Mar)**                                                3.0%          2.7%          0.6%A            0.9%           0.7%          0.6%          0.6%          0.8%
                    Govt (14 Nov)                                                       2.9%          3.1%
                    BoC (26 Jan)                                                        3.1%          2.9%
Australia           Morgan Stanley (31 Mar)                         2.8%A               2.1%          0.8%
                    Consensus (10 Apr)**                                                3.2%          3.4%          2.7%A            2.9%           2.7%          3.4%          3.8%          3.6%
                    Govt (15 Dec) – FY                                                  3.0%
*All quarterly numbers are q/q except for the US and Australia, which are q/q annualized.
**Quarterly Consensus forecasts are from 13 Mar.
***Quarterly figures are from 3 Mar.
Source: Morgan Stanley Research, Consensus Economics and official websites

Where Does Morgan Stanley See Official Interest Rates?
                                              Last Move Total Easing/                          Next            Morgan Stanley f/cs (%)
                      Current                   in Cycle  Tightening                   Announcement                Jun 06          Sept 06     Next Key Report
Fed                     4.75%        +25bp (28 Mar 06)               +375bp            10 May (+25bp)              5.00%            5.25%     FOMC Beige Book (26 Apr)
BoJ                     0.00%       Easing (20 Jan 04)1                 N/A                  28 Apr (-)            0.00%            0.25%     Outlook for Economic Activity (28 Apr)
ECB                     2.50%         +25bp (2 Mar 06)                +50bp                  4 May (-)             2.75%            3.00%     ECB Monthly Bulletin (11 May)
BoE                     4.50%         -25bp (4 Aug 05)                -25bp                  4 May (-)             4.50%            4.50%     BoE Inflation Report (10 May)
BoC                     3.75%         +25bp (7 Mar 06)               +175bp             25 Apr (+25bp)             4.00%            4.00%     Monetary Policy Report (27 Apr)
SNB                     1.25%        +25bp (16 Dec 05)                +75bp            15 Jun (+25bp)              1.50%            1.75%     Monetary Policy Assessment (15 Jun)
RBA                     5.50%         +25bp (2 Mar 05)                +25bp                  3 May (-)             5.50%            5.50%     Statement on Monetary Policy (5 May)
RBNZ                    7.25%         +25bp (8 Dec 05)               +225bp                  27 Apr (-)            7.25%            7.00%     Financial Stability Report (10 May)*
Riksbank                2.00%        +25bp (23 Feb 06)                +50bp                  28 Apr (-)            2.25%            2.25%     Riksbank Inflation Report (20 Jun)
Norges Bank             2.50%        +25bp (15 Mar 06)                +75bp                  26 Apr (-)            2.75%            2.75%     Govt. Petroleum Fund – Quarterly (20 May)
1
  On 9 March 2006, the BoJ changed "the operating target of money market operations from the outstanding balance of current accounts ... to the uncollateralized call rate." “Outstanding balances
  will be reduced toward a level in line with required reserves and, for the inter-meeting period, the BoJ will encourage the uncollateralized call rate to remain at effectively zero percent."
* Denotes timing approximate.
Source: Morgan Stanley Research and central bank websites.



See additional important disclosures at the end of this report.                                                                                                                               14
                                                                               MORGAN STANLEY FIXED INCOME RESEARCH

                                                                               April 20, 2006
                                                                               FX Pulse
                                                                               Oil Slick




Strategy Views for the Week Ahead
C. Ted Wright


USD – Surprised at USD Weakness. Neutral for Now                               GBP – Still Bearish; Just Need the One-off Flows to Abate
We have been surprised by recent USD weakness. For one, we did not             We remain bearish GBP on both a tactical and strategic basis. This is
anticipate the dovish reaction to the recent FOMC minutes. With the FX         primarily based on a cyclical view: we think the UK economy is likely to
market still concerned about downside risks to the US economy, a ‘data-        post below-trend growth this year, as consumption remains weak and the
dependent’ FOMC is negative for the USD. Second, we think USD bears            economy fails to rebalance. Lately, GBP has been boosted by a
have been encouraged by the looming IMF/World Bank and G7 meetings:            combination of excessive short positioning and some one-off buying of
the ‘imbalances’ are back in the headlines. We were stopped out of our         GBP. We expect the latter to abate over time, and believe the former is
remaining USD long position this week, and are currently neutral. But we       less of an issue at these levels. So we reiterate our bearish view on GBP,
remain unconvinced a USD-weakness trend is unfolding. This week watch          and believe that long EUR/GBP is a good risk-reward here, with a stop at
consumer confidence, existing home sales (25 Apr), durable goods, new          0.6965. Data this week include retail sales (24 Apr), GDP (26 Apr) and
home sales (26 Apr) and GDP (28 Apr). FOMC Bernanke speaks (27 Apr).           consumer confidence (28 Apr).

EUR – Coming Business Survey Data Will Be a Test for EUR                       AUD – Turning Neutral on AUD; RBA Expectations at Zenith
The recent strength in Europe-wide business surveys is well-noted.             We turn neutral on AUD at current levels. In late March, we thought the
Indeed, it has prompted much of the enthusiasm in the market towards           market had mispriced the more favorable developments in the local
cyclical developments in the Eurozone. As a result, the release of surveys     economy, and that event risk in early April would re-focus market attention
this week – INSEE (24 Apr), IFO (25 Apr) and ISAE (27 Apr) – should            on these variables. This has largely taken place, and RBA expectations
prove a key test for sentiment for EUR. We generally expect stable             have shifted dramatically. Thus, we would exit any outstanding long AUD
readings, consistent with trend-like growth in early Q2. This should allow     positions: for us, this means we are no longer short GBP/AUD. Looking
the ECB to continue with its tightening process, with another move in          ahead, we believe the Q1 CPI data (26 Apr) is a key risk event, and
June. We anticipate ECB speakers this week – including Trichet (24 Apr),       should affect expectations for the RBA. While we believe the probability of
Papademos (25 Apr) and Weber (25 Apr) – to reiterate this point. We are        RBA tightening this year has increased, we are not sure any new hawkish
equivocal on most EUR-crosses, except EUR/GBP, where we are bullish.           signals will materialize in the RBA Statement (5 May).

JPY – Market Confused; Risk Events Ahead May Provide Clarity                   NZD – RBNZ a Key Event; Likely to Still Rule Out Easing in ‘06
The market remains confused on the near-term direction for JPY. This           The upcoming RBNZ rate decision (27 Apr) is the key risk event in the
confusion also extends to the policymaking environment: signals from the       coming week. Although economic data have disappointed lately, inflation
BoJ have been rather limited since the end of QE in early March. As a          is still above the RBNZ target, and higher energy prices, and recent NZD
consequence, we continue to believe the market does not have a sizable         weakness, may keep it there a while longer. As a result, we think the
JPY position at present. The important levels – 116.50 and 119.20 – are        RBNZ is likely to reiterate its policy stance this week – i.e., emphasize that
known to all, and thus a range break – or some news on the policy front –      it is unlikely to be in a position to ease policy this year. This should be a
will be required to generate interest. In that context, upcoming CPI and       disappointment to NZD bears, and we still think the market is short NZD
unemployment data (28 Apr) are important, as too is the next BoJ decision      on balance (although greatly reduced). We maintain our neutral stance on
(28 Apr), where the Bank will publish its Outlook publication.                 NZD at present. Other data include NBNZ business confidence (26 Apr).

CAD – Staying with Bearish View; BoC Signaling Important                       SEK – Still Positive SEK; And Will Remain So for a While
We believe that recent economic data still justify a pause following the       We remain positive SEK. This relates to a number of factors. First, we
next Bank of Canada rate decision. Indeed, we think the softer tone to Q1      continue to believe that economic developments in Sweden will be very
data, as well as the favorable news on capacity constraints in the             robust this year. As a result, we expect the Riksbank to return to its
Business Outlook Survey, are enough to push the Bank to the sidelines,         tightening cycle by June, with signaling to that effect earlier in the quarter.
albeit with a tightening bias, after a 25bp rate hike this week (25 Apr).      Second, we think the election later this year is a SEK-positive risk event: a
Furthermore, the Bank can explain its reasoning for such a move with the       change in government would like usher in tax cuts and privatization. We
MPR publication (27 Apr). We do not believe the market shares this view.       expect EUR/SEK to trade towards 9.10 by June and would sell rallies in
As a consequence, we think there are downside risks to CAD in the week         this currency pair for the time being. We are also bearish CAD/SEK and
ahead. Other relevant data include retail sales (21 Apr), GDP (28 Apr).        NOK/SEK at current levels.

NOK – Norges Bank Unlikely to Bring Comfort to NOK Bulls                       CHF – Increasingly Volatile; We Remain Neutral EUR/CHF
The market is bullish NOK. This is probably a function of higher energy        We had expected EUR/CHF to remain stable over the holiday period.
prices, and the price action in NOK itself. We did not anticipate such         Instead, this currency pair weakened rather sharply, and then retraced, on
weakness, and continue to believe the market is ahead of itself in buying      ostensibly very little fresh news. We suspect the CHF strength is due in
NOK. Importantly, the Norges Bank rate decision and statement this week        some part to the sizable CHF shorts in the market, particularly among IMM
(26 Apr) is unlikely to bring comfort to NOK bulls: we think the Bank will     names. So where do we go from here? We remain uninterested in this
say that currency strength will bring down inflation looking ahead, and also   currency pair. The SNB appears content to tighten policy at the same pace
suggest there have been no offsets – i.e., upside surprises to growth – to     as the ECB, and the risk-appetite properties of CHF have abated
this development. As a consequence, we think there are downside risks to       considerably. In the week ahead, key data include trade (25 Apr), and the
NOK in the week ahead. In particular, we like NOK/SEK shorts.                  KOF indicator (28 Apr). A strong KOF may interest the market in CHF.




See additional important disclosures at the end of this material.                                                                                         15
                                                                                   MORGAN STANLEY FIXED INCOME RESEARCH

                                                                                   April 20, 2006
                                                                                   FX Pulse
                                                                                   Oil Slick




EM FX Strategy Views
Gyula Pleschinger (44 20) 7677-3254, Gray Newman (212) 761-6510, Heloisa Marone (212) 761-4132, Luis Arcentales (212) 761-4913,
Franklin Adatsi (212) 761-0919


PLN – Zloty Could Gain from Political Stability                                    HUF – Eyeing Elections
PLN remains hostage to local political developments as ruling PiS is               HUF continues to underperform its regional peers ahead of the second
making slow progress in securing a government majority by engineering a            round of general elections (April 23). While the current Socialist-Liberal
conservative-populist coalition. While populist Samoobrona already                 government is widely expected to retain power, we warn against writing off
agreed to join the government, consent of at least one of the two small            the opposition’s chances just yet. We expect the HUF to recover on the
single-issue parties (LPR and PSL) is still needed. The new cabinet, once          back of a coalition victory but also see re-emerging weakness later as the
established, is likely to stick to the prudent fiscal policies implemented by      post-election fiscal adjustments will likely disappoint the market.
MinFin Gilowska, which will likely lend support for the PLN, in our opinion.       Conversely, the less likely opposition victory could stir near-term
Even relative political stability in the near-term could shift the market’s        nervousness owing to Fidesz’s overly ambitious spending promises, but
focus on currency-supportive macroeconomic fundamentals, which – in                the pragmatic MDF’s unavoidable participation in governance will likely
our view – would allow depreciation to sub-3.80 levels against the EUR.            mean more forward-looking budget reforms (and marked HUF recovery) in
                                                                                   the medium term.
SKK – Staying Konvergence-Konstructive
                                                                                   TRY – New CBRT Governor
We continue to like SKK on a long-term valuation basis and expect the
most ambitious and transparent euro-adoption program among the CE4                 The unnecessarily long procedure of the appointment of the new CBRT-
countries to support the currency in the coming months. We maintain our            head concluded this week after President Sezer approved Durmus Yilmaz
optimistic 36.75 target for the next two months with a bullish bias. SKK           as the new governor of the Bank. Mr Yilmaz, member of the MPC, in his
price action over the past months proved that investors’ confidence in the         first speech promised the continuation of inflation targeting monetary
positive currency outlook remained largely intact. We continue to see a            policy. While Yilmaz was probably not the preferred candidate of the
populist shift in local politics and a hesitant central bank as the key risks to   market, his appointment was welcomed, as reflected in the two-day
our constructive view. That said we expect a 50 bp rate hike by the MPC            outperformance of the TRY. We expect Turkey’s recent track record (and
on Tuesday to lend near-term SKK support. (Please see the SKK article              likely continuation) of prudent economic policies and structural reforms to
in this issue.)                                                                    support TRY stability in the medium term.

PEN – Election Uncertainty Continues While Markets Rally                           CLP – Line in the Sand?
While Peru election uncertainty continues even with more than 90% of the           With copper prices making and breaking new record highs, the CLP rallied
vote counted, Peruvian markets continue to stage a strong rally reversing          to one of the strongest levels in nearly five years. Moreover, monetary
part of the pre-election sell-off. PEN has rallied over 2.0% in the last two       authorities – after delivering a 25bp hike last week – left the door open to
weeks, and Peruvian debt and equities have outperformed the region over            further tightening. Despite these tailwinds, however, CLP has failed to
the last few weeks. After almost two weeks of vote counting, uncertainty           break the 500 mark, and it seems unlikely to do so in the coming weeks.
on candidates for the run-off remains largely intact. With more than 90%           For one thing, the risk of intervention near the 500 “line in the sand,”
of the vote counted, Alan Garcia (23.33%) appears likely to edge out               despite some signals to the contrary, remains alive, in our view. For
Lourdes Flores (23.59%) to compete with Ollanta Humala in the run-off.             another, facing pressure from exporters, the administration is seeking
PEN and other Peruvian assets are likely to face another bout of volatility        ways to keep the currency from strengthening further. Until more clarity is
as candidates for the run-off provide more clarity on their policies.              provided on the policy front, we sense the currency is likely to be range-
                                                                                   bound.




See additional important disclosures at the end of this material.                                                                                          16
                                                                                            MORGAN STANLEY FIXED INCOME RESEARCH

                                                                                            April 20, 2006
                                                                                            FX Pulse
                                                                                            Oil Slick




Forecast Highlights
                                                                                            Exhibit 1
                                                                                            The Majors – Current Forecasts
There are no forecast changes this week.
                                                                                                10%                                                                        JPY
                                                                                                             % Forecast Appreciation
                                                                                                8%           vs the USD

                                                                                                6%
                                                                                                4%
                                                                                                2%
                                                                                                                                                                         EUR
                                                                                                0%
                                                                                                                                                                         CHF
                                                                                                -2%
                                                                                                -4%                                                                       GBP
                                                                                                -6%
                                                                                                  Apr-06          Jun-06            Aug-06         Oct-06           Dec-06

                                                                                            Source: Morgan Stanley Research Estimates


                                                                              Quarter-end                                                      Averages*
                                     Current         Jun-06        Sep-06     Dec-06   Mar-07    Jun-07      Sep-07         2003        2004        2005        2006         2007

EUR/USD                                  1.23           1.20         1.22       1.24     1.26       1.28       1.24          1.13       1.24        1.24        1.21        1.25
USD/JPY                                   118            113          108        106      102        102        102           116        108         110         113         102
USD/CHF                                  1.27           1.33         1.31       1.27     1.24       1.21       1.23          1.34       1.24        1.25        1.30        1.24
GBP/USD                                  1.78           1.69         1.69       1.72     1.75       1.78       1.72          1.63       1.83        1.82        1.72        1.73
EUR/JPY                                   145            136          132        131      129        131        126           131        134         137         137         128
USD/CAD                                  1.14           1.18         1.20       1.22     1.22       1.24       1.26          1.40       1.30        1.21        1.18        1.24
AUD/USD                                  0.74           0.72         0.68       0.67     0.67       0.66       0.65          0.65       0.74        0.76        0.71        0.66
NZD/USD                                  0.63           0.58         0.56       0.57     0.58       0.58       0.58          0.58       0.66        0.70        0.60        0.58
EUR/GBP                                  0.69           0.71         0.72       0.72     0.72       0.72       0.72          0.69       0.68        0.68        0.71        0.72
EUR/CHF                                  1.57           1.60         1.60       1.58     1.56       1.55       1.53          1.52       1.54        1.55        1.58        1.55
EUR/DKK                                  7.46           7.46         7.46       7.46     7.46       7.46       7.46          7.43       7.44        7.45        7.46        7.46
EUR/SEK                                  9.29           9.20         9.10       9.10     9.10       9.10       9.10          9.12       9.12        9.28        9.22        9.10
EUR/NOK                                  7.79           7.85         7.70       7.60     7.60       7.60       7.60          8.01       8.37        8.01        7.83        7.60
EUR/CZK                                 28.48          28.00        28.30      27.80    27.50      27.50      27.30         31.85      31.90       29.78       28.28       27.42
EUR/HUF                                265.54         255.00       262.00     265.00   265.00     265.00     265.00        253.55     251.54      248.08      259.52      264.60
EUR/PLN                                  3.89           3.60         3.70       3.70     3.80       3.80       3.70          4.40       4.53        4.02        3.74        3.72
EUR/SKK                                 37.30          42.34        41.68      41.85    42.16      43.68      44.02          41.5       40.0        38.6        40.2        43.2
USD/ILS                                  4.56           4.65         4.60       4.50     4.45       4.45       4.45          4.55       4.48        4.49        4.61        4.46
USD/TRY                                  1.33           1.43         1.46       1.48     1.49       1.50       1.50          1.50       1.43        1.35        1.40        1.49
USD/CNY                                  8.01           7.80         7.65       7.50     7.35       7.25       7.10          8.28       8.28        8.19        7.82        7.23
USD/HKD                                  7.76           7.80         7.80       7.80     7.80       7.80       7.80          7.79       7.79        7.78        7.78        7.80
USD/IDR                                 8,885          8,800        8,700      8,600    8,500      8,500      8,500         8,572      8,940       9,712       8,901       8,512
USD/INR                                 45.10          44.00        43.50      42.50    42.00      42.00      42.00         46.56      45.25       44.10       43.92       43.91
USD/KRW                                   949            950          940        920      900        900        880         1,191      1,145       1,025         951         895
USD/MYR                                  3.66           3.70         3.65       3.60     3.50       3.50       3.50          3.80       3.80        3.79        3.68        3.51
USD/PHP                                 51.50          50.50        50.00      49.50    49.50      49.00      49.00         54.20      56.05       55.07       50.72       49.18
USD/SGD                                  1.60           1.60         1.60       1.60     1.58       1.57       1.56          1.74       1.69        1.66        1.61        1.57
USD/TWD                                 32.30          32.00        30.70      29.50    28.80      28.50      28.30         34.40      33.35       32.18       31.50       28.58
USD/THB                                 37.75          38.00        38.00      37.50    37.00      37.00      37.00         41.52      40.25       40.28       38.26       37.06
USD/BRL                                  2.12           2.00         2.25       2.40     2.20       2.20       2.20          3.07       2.93        2.43        2.39        2.64
USD/MXN                                 10.96          11.00        11.30      11.20    11.20      11.20      11.30         10.80      11.29       10.89       10.87       11.30
USD/ARS                                  3.08           3.10         3.10       3.10     3.15       3.30       3.20          2.95       2.94        2.92        3.03        3.15
USD/VEB                                 2,147          2,147        2,147      2,300    2,300      2,300      2,500         1,612      1,885       2,109       2,224       2,400
USD/CLP                                   513            530          540        540      550        550        560           691        610         560         528         550
USD/COP                                 2,338          2,300        2,400      2,400    2,400      2,400      2,400         2,877      2,627       2,321       2,325       2,400
Forecast Changes in Bold
G10 forecasts were updated April 6, 2006                                                                                                                     N/A = Not Available
*Averages calculated from daily data; E = Morgan Stanley Research Estimates                                                         Source: Reuters and Morgan Stanley Research



See additional important disclosures at the end of this material.                                                                                                            17
                                                                                                          MORGAN STANLEY FIXED INCOME RESEARCH

                                                                                                          April 20, 2006
                                                                                                          FX Pulse
                                                                                                          Oil Slick




FX Tactical Indicators Table
Currency Research Team

                                                                                FX Research Macro Views
                                                                                  Stopped         Take                        Stopped          Add
                                                                                    Out           Profit                        Out           Long          Short          Short
Macro Tactical Recommendations                         Neutral       Neutral      EUR/JPY        GBP/AUD         Neutral      GBP/USD        EUR/GBP       CAD/SEK        NOK/SEK        Neutral
    Reassessment levels                                                                                                                       0.6865        6.8050         1.2050
                                                        USD         EUR/USD        USD/JPY       AUD/USD        USD/CAD       NZD/USD        EUR/GBP       EUR/SEK        EUR/NOK       EUR/CHF
Year-end target 2006                                    83.86        1.240          106.00        0.670           1.22         0.570          0.720          9.10           7.60         1.580
   Current Spot Rate                                    84.96         1.233         117.46         0.743           1.14         0.631          0.692          9.28          7.80          1.574
                                                                                    MS Flows Indicators
                                                        USD         EUR/USD        USD/JPY       AUD/USD        USD/CAD       NZD/USD        EUR/GBP       EUR/SEK        EUR/NOK       EUR/CHF
3-Mo cumulative exposure all clients                  Neutral         Long           Long          Short         Neutral        Short        Neutral         Short          Long         Neutral
   Latest w eekly flow s                               Net Sell      Net Buy       Net Buy        Net Buy        Net Sell      Net Sell       Net Sell      Net Sell       Net Sell      Net Sell
   Consecutive buys/sells (w ks)                          -2             5             0              2             0             -11            0             -2             0              0
   Max consecutive buys/sells (w ks)                     -12             6             0             10             0             -11            0             -6             0              0
3-Mo cum. exposure US clients                           Long         Neutral         Long          Short         Neutral        Short        Neutral         Short        Neutral         Long
   Latest w eekly flow s                               Net Sell      Net Buy       Net Buy        Net Buy        Net Sell      Net Sell       Net Sell      Net Sell       Net Sell      Net Sell
   Consecutive buys/sells (w ks)                          -2             5             0              0             0             -11            0             -2             -4             0
3-Mo cum. exposure non-US clients                     Neutral        Neutral       Neutral        Neutral        Neutral       Neutral       Neutral         Short          Long          Short
   Latest w eekly flow s                               Net Sell      Net Buy       Net Buy        Net Sell       Net Sell      Net Buy        Net Sell      Net Sell       Net Sell      Net Sell
   Consecutive buys/sells (w ks)                          -5             3             0              0             0              0             0              0             0              0
                                                                                   Technicals Indicators
                                                        USD         EUR/USD        USD/JPY       AUD/USD        USD/CAD       NZD/USD        EUR/GBP       EUR/SEK        EUR/NOK       EUR/CHF
1-2 week view                                        Negative       Positive       Neutral        Neutral        Neutral       Neutral       Neutral        Neutral       Neutral       Negative
  2nd upside level                                      89.60        1.2510         120.15        0.7580         1.1645        0.6470         0.7020          9.48         8.0200         1.5850
  1st upside level                                      88.45        1.2445         119.00        0.7500         1.1535        0.6350         0.6965          9.38         7.9200         1.5730
  1st dow nside level                                   86.75        1.2215         116.60        0.7315         1.1300        0.6180         0.6870          9.21         7.7000         1.5630
  2nd dow nside level                                   86.00        1.2165         115.50        0.7250         1.1190        0.6000         0.6800          9.12         7.6000        1.5570
                                                                                   Long-Term Valuations
                                                        USD         EUR/USD        USD/JPY       AUD/USD        USD/CAD       NZD/USD        EUR/GBP       EUR/SEK        EUR/NOK       EUR/CHF
Median fair value (2005 Q4)                            115.78          1.16         101.31          0.69           1.23          0.60          0.68           8.73          8.17           1.43
%over(under)valuation(05Q4 spot avg)                   (5.8%)         1.8%          16.5%          5.7%          (4.7%)         13.6%         (0.3%)         7.5%          (2.3%)         8.7%
  Length of over (under) valuation (qrts)                (2)            11             3             11            (10)           12            (3)            21            (3)            11
 Max length of over (under) valuation (qrts)             15             16            12            (22)           (22)           18            29             21            22            (14)
                                                                                       Macro Indicators
                                                        USD            EUR            JPY           AUD            CAD           NZD           GBP            SEK           NOK            CHF
Policy rate June 2006                                  5.00%          2.75%         0.00%          5.50%          4.00%         7.25%         4.50%          2.25%         2.75%          1.50%
    Current level                                      4.75%          2.50%         0.00%          5.50%          3.75%         7.25%         4.50%          2.00%         2.50%          1.25%
GDP growth 2006                                         3.5%           2.1%          3.2%           2.1%          3.1%           2.5%          2.3%           3.5%          2.8%           2.1%
     2005 figure                                        3.5%          1.4%           2.7%          2.8%           2.9%          2.5%           1.8%          2.7%           2.6%          1.9%
                                                                                     Optimized Portfolio
                                                        USD            EUR            JPY           AUD            CAD           NZD           GBP            SEK           NOK            CHF
   Model Portfolio                                       Buy           Buy            Sell          Buy            Sell          Buy            Sell          Buy            Sell          Sell
   Carry Portfolio                                       Buy           Buy            Sell          Buy            Sell          Buy            Buy           Sell           Buy           Sell

Please note that in the ‘Technical Indicators’ section, the USD index refers to the DXY, while in the ‘FX Research Macro View’ and ‘Long-Term Indicators’ sections, the USD refers to the Fed’s Major
Currencies USD index.
Source: Morgan Stanley Research, EcoWin, and IMF




See additional important disclosures at the end of this material.                                                                                                                                 18
                                                                           MORGAN STANLEY FIXED INCOME RESEARCH

                                                                           April 20, 2006
                                                                           FX Pulse
                                                                           Oil Slick




Reading FX Tactical Trade Performance and Indicators

  FX Tactical Trade Recommendations page presents the performance of FX Strategy views and models. Exhibits 1 and 2 on page
  4 present estimated performance of the following portfolios:

  • FX Strategy Portfolios. Note: The portfolios represent hypothetical not actual investments.
      ‘Tactical Macro Trades’ - an equally weighted basket of the weekly trade recommendations that always appear on page 4 ‘FX
       Tactical Trade Recommendations’ of the ‘FX Pulse’. Exhibit 2 shows the cumulative history of this portfolio;
      ‘Top Picks 2006’ is an optimized portfolio of top trade ideas for the current year and elaborated in the ‘FX Pulse’ of January 5,
       2006 and comprise: short USD/JPY, AUD/USD, GBP/USD, NZD/USD, and long EUR/USD, JPY/NZD, CHF/CAD, SEK/GBP,
       CHF/GBP, EUR/NZD. These are longer-term views set at the beginning of the year and not changed until the start of the
       following year. ‘Top trades’ started in 2005, thus cumulative returns include portfolios for 2005 and 2006 only.
      ‘Model Portfolio’ is a portfolio of the ‘FX Tactical Trade Recommendations’, whose weights are generated using a Black-
       Litterman approach of integrating our views with a default portfolio that contains no active views, only carry.
      ‘Carry Portfolio’ is constructed by an optimization based on interest rate differentials and the correlation between spot rates.
  • Performance Statistics
      The weekly P&L highlights how are trades have fared since the previous FX Pulse. Here the P&L is calculated by looking at
       both the weekly change in spot rates as well as the cost of carry. The change in FX is calculated by looking at spot rates at the
       WM rates recorded at 4 pm London time on Thursday relative to the same time the previous week. Funding costs are
       calculated using 1-week libor rates. Please note neither slippage nor the bid-ask spread are incorporated in our calculations;
      The performance year-to-date is reported. Here, not only is the cumulative P&L calculated, but also the Sharpe Ratio as well
       as the realized volatility of each basket;
      The same statistics are reported for the performance of our recommended trades and allocations since we started formally
       keeping track of a portfolio on 29 April 2004. Note, while the Sharpe Ratio and the realized volatility are calculated in the same
       way as with the statistics of the performance year-to-date, the returns are different. Indeed, in this section the P&L refers to the
       cumulative performance (not annualized).
  • The Global Risk Demand Index. Exhibit 3 is our Standardized Global Risk Demand Index, explained in more detail in
    Francesca Fornasari’s ‘G10: Introducing the MS Global Risk Demand Index’ – May 13, 2004).

  The FX Tactical Indicators table highlights the most recently updated indicators we, as a research team, use as inputs to generate
  both our longer and more tactical forecasts and to clearly outline the team’s views, both longer term as well as tactical.
  • FX Research Macro Views. Our collective views are presented here. The ‘Macro Tactical Recommendations’ highlight our
    tactical recommendations. Details of the performance are presented in Exhibit 2 and 3. The ‘Year-End Targets’ represent our
    longer term forecasts.
  • MS Flows Indicators. The statistics provided here relate to our in-house flows. The ‘3-mo Cumulative Exposure’ refers to the
    volume-adjusted 13-wk cumulative net flows into any currency. Such exposure is labeled as ‘Long’ (‘Short’) if it is larger (smaller)
    than half of the series’ (negative) standard deviation. If the cumulative exposure is between half standard deviation and negative
    half a standard deviation, then exposure is labeled as ‘Neutral’. ‘Record Long’ and ‘Record Short’ exposures are also noted. The
    ‘Divergence US/non US clients’ refers to the gap in the volume-adjusted 13-wk cumulative net flows into any currency between
    US and non-US investors. Such exposure is labeled as ‘Positive’ (‘Negative’) if it is larger (smaller) than half of the series’
    (negative) standard deviation. If cumulative exposure is between a half standard deviation and a negative half a standard
    deviation, then exposure is labeled as ‘Neutral’. ‘Record Positive’ and ‘Record Negative’ divergences are also noted. The FX
    Flows Signals for FX refer to the currency bias stemming from net FX flows (for more details see Francesca Fornasari and
    Sharon Yeshaya’s ‘G10: Using MS FX Flows to Trade FX’ – April 14, 2005).
  • Technicals Indicators. Views and levels identified by our technical analyst, Drew Baptiste. Drew's material is not produced by
    our research department or subject to our conflict of management policy. (For more details see Drew Baptiste’s ‘FX/IR Technical
    Analysis’ pieces from March 25 through April 8, 2004. To be added to Drew’s mailing list, contact
    Andrew.Baptiste@morganstanley.com).
  • Long-Term Valuations. This section refers to the work Stephen Jen has done on long-term FX valuations. (For more details see
    Stephen Jen’s ‘The USD is Still Cheap, Very Cheap’ – January 27, 2005). The fair value estimates refer to the median value of
    Stephen’s 12 valuation models.
  • Macro Indicators. The aim here is to summarize all relevant macro forecasts. In most cases, the forecasts are those of Morgan
    Stanley economists. Where these latter were not available, the IMF World Economic Outlook forecasts were included.




See additional important disclosures at the end of this material.                                                                             19

				
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