Will the euro become a low-yield currency good for carry?
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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)
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