Goldman and JP Morgan: "Euro is the Next Target After Carry Trade"

Candidates for Funding to Replace Yen
Impact of ECB Rate Cut and BOJ Rate Hike
Borrowing Euro to Invest in Rupee, Peso, Real, etc.

As the European Central Bank (ECB) prepares for an interest rate cut, the euro has emerged as a major candidate for carry trade funding, following the Japanese yen.

On the 28th (local time), Bloomberg reported that Goldman Sachs, JP Morgan, and others are focusing on the euro for carry trade funding.

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With the market expecting the ECB to begin early rate cuts around March to April, the euro is currently showing weakness among the major 10 currencies. Wall Street predicts that the Eurozone benchmark interest rate will fall to 2.5% by the end of this year. In contrast, the U.S. is expected to lower rates only to 4%. Additionally, the policy shift of the Bank of Japan (BOJ), which had maintained a negative interest rate policy, has also influenced this trend. While the yen's value had fallen to historic lows due to the negative interest rate policy, recent signals from the BOJ about rate hikes have led traders to seek alternatives beyond the yen.

Kamaksha Trivedi, Head of Global Currency, Rates, and Emerging Markets Strategy at Goldman Sachs, stated, "The euro faces several headwinds such as the German economic recession and weakening private sector activity," adding, "It is an attractive funding option."

Loren Van Biljon, Portfolio Manager at Allspring Global Investments, said, "Europe's growth feels more unstable compared to other major G10 countries," and added, "This could create room for the ECB to cut rates earlier in Q2 than the U.S. and the U.K." He continued, "Due to low volatility, the euro has become one of the funding methods for high-yield emerging market currencies."

The euro exchange rate has fallen about 1.6% compared to the beginning of this year. Goldman Sachs is currently betting on euro weakness against the Indian rupee. They expect the euro to decline about 3%, falling to around 88 rupees per euro. JP Morgan strategists analyze that the strong U.S. economy, Eurozone weakness, and geopolitical risks are hindering the euro's recovery.

Mira Chandan, Co-Head of Global FX Strategy at JP Morgan, said, "As the ECB shifts to a dovish stance (favoring monetary easing), the euro is being used more as a funding currency rather than for value recovery."

Although the full-scale rate cut has not yet begun, the euro is already showing carry trade investment performance against the dollar. According to data compiled by Bloomberg, borrowing euros to buy high-yield Argentine pesos can yield an 8% return this month. In contrast, borrowing dollars during the same period yields only a 6% return. However, the yen's yield remains the highest at 11%, making it still the most profitable choice for carry trade investments.

Valentin Marinov, Head of G10 Currency Research at Credit Agricole CIB, said, "Clients have been discussing shorting euros against the Mexican peso, Brazilian real, and Indian rupee," adding, "If BOJ and ECB policies start to diverge significantly from Q2, such investments could become even more attractive."

Ian Cunningham, Head of Multi-Asset Growth at Ninety One Asset Management, said, "The biggest positioning imbalance over the next 12 to 18 months will occur between Europe and Japan," and added, "Europe will be forced to ease, while Japan will be forced to tighten." He expects the euro to decline against the yen and has borrowed euros to buy Turkish lira, South African rand, and Chilean peso.

This content was produced with the assistance of AI translation services.