Will the euro become a low-yield currency good for carry?
Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at markets.research@thomsonreuters.com
WILL THE EURO BECOME A LOW-YIELD CURRENCY GOOD FOR CARRY?
Investors have used the yen for carry trade for ages, borrowing the Japanese currency, where interest rates are low, and then buying higher-yielding assets elsewhere.
However, things are changing after the Bank of Japan exited its ultra-dovish monetary policy.
According to Vincent Deluard, director of global macro strategy at StoneX, “the euro will become the new funding currency of the global carry trade.
He says the yen is currently cheaper than the euro, and market pricing of substantial Fed rate cuts by June ignore "the risk that tariffs, minimum wage increase and fiscal stimulus will ignite a second wave of inflation."
In addition “The euro area economy is the only one with an unemployment problem."
“Given this outlook, it would be logical for the European Central Bank to cut more aggressively than the Federal Reserve,” he argues. “When this happens, the euro will plummet.”
Sharp appreciation in a funding currency is bad news for carry trades.
The French political crisis could worsen, adding to the euro’s weakness.
Latam currencies are competitive, but a “higher Fed rate would prevent Latam from cutting more than 100 bps and maintain a juicy real spread for euro carry trades.”
(Stefano Rebaudo)
*****
FOR FRIDAY'S OTHER LIVE MARKETS POSTS
WEAK START AHEAD BUT STOXX RECORD JUST IN REACH CLICK HERE
BRING ON THE RATE CUTS CLICK HERE
Core inflation in Tokyo accelerates https://reut.rs/3YZh0M1
Related Assets
Latest News
Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.
All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.
Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.
