As I wrote earlier: If you change your default OEMCP permanently to 1252 in the registry, reboot your PC, and start a new MSYS, set MSYS terminal font to true type Lucida Console, then your MSYS shell will show exactly the same as notepad. Because now msys will not do a conversion.
The cat command applied to a Latin1 text file shows its contents as the active codepage in Windows console, CP850. I would expect the output to be displayed erroneously as if it was CP850 instead, just like cmd.exe's type does for the same text file. A script I wrote, which prints in CP850 by default, is displayed correctly as CP850, as expected. A testing program written as Latin1 prints text correctly as Latin1 mistook for CP850. However, when the output is piped to cat (both in bash and cmd.exe), it gets displayed as if the bytes themselves were CP850. I would expect the pipe operation to not change anything.