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11 Jun 2014
EUR and JPY to replace USD on funding role - RBS
FXStreet (Bali) - Greg Gibbs, FX Strategist at RBS, expects the EUR and JPY to take over the funding role from USD.
Key Quotes
"US yields moved higher yesterday, improving the USD yield advantage especially against the EUR and JPY, both of which should be increasingly viewed as the best currencies to fund carry trades, in our view. As such, we expect both to weaken."
"One-month cash rate futures for the EUR have dropped to below 7bp, approaching levels seen in Japan but below those in the US, of over 9bp. With the US expected (by the market) to begin allowing cash rates to rise above 25bp by mid-2015, and both the BoJ and ECB expected (by us and the market) to crunch cash rates to near zero for the foreseeable future, yields further out the curve continue to favour a stronger USD."
"EUR price action is negative, falling below the range in the week before the ECB policy easing on 5 June (excluding the whippy action on the day of the ECB meeting). It suggests that as the markets have had time to absorb and adjust to the ECB message, they have concluded that the EUR is a better sell; potentially to fund carry trades in higher-yielding currencies."
"While the potential for FX reserves diversification may generate demand for the EUR, we must consider the original source of the capital that flows to higher-yielding EM currencies. If it comes from borrowing in EUR or JPY, then reserves diversification would only partially offset the outflow from the EUR and JPY."
Key Quotes
"US yields moved higher yesterday, improving the USD yield advantage especially against the EUR and JPY, both of which should be increasingly viewed as the best currencies to fund carry trades, in our view. As such, we expect both to weaken."
"One-month cash rate futures for the EUR have dropped to below 7bp, approaching levels seen in Japan but below those in the US, of over 9bp. With the US expected (by the market) to begin allowing cash rates to rise above 25bp by mid-2015, and both the BoJ and ECB expected (by us and the market) to crunch cash rates to near zero for the foreseeable future, yields further out the curve continue to favour a stronger USD."
"EUR price action is negative, falling below the range in the week before the ECB policy easing on 5 June (excluding the whippy action on the day of the ECB meeting). It suggests that as the markets have had time to absorb and adjust to the ECB message, they have concluded that the EUR is a better sell; potentially to fund carry trades in higher-yielding currencies."
"While the potential for FX reserves diversification may generate demand for the EUR, we must consider the original source of the capital that flows to higher-yielding EM currencies. If it comes from borrowing in EUR or JPY, then reserves diversification would only partially offset the outflow from the EUR and JPY."