Euro grows on carrie trades Forex market news19 / April / 2020
This week, the euro was rising against the US dollar, which was difficult to expect given the weakness of the eurozone economy and the widest coronavirus spread outside Asia.
Investors are buying the euro and since the end of last week it rose against the US dollar by 1.8%. They are not buying the euro because they expect the eurozone economy to turn towards growth, or because Europe has suddenly become a safe haven for assets amid rising risks.
According to some analysts and investors, the reason for this paradoxical market dynamics was carrie trades: investors take cheap loans in euros and invest in more risky assets in a volatile market, and then sell these assets in order to buy the euro and complete the deals.
"Markets are not always rational," said Nomura Holdings currency strategist and analyst Jordan Rochester. In Italy, the situation is worsening, there are more cases (infection with coronavirus), but the euro is growing. This is a zeroing of positions on carrie trades".
This year, some analysts and investors were surprised by the weakness of the euro on the background of improvement of traditional drivers of its growth. The difference between interest rates in Eurozone and the U.S. decreased, which theoretically should have weakened the attractiveness of the dollar. At the same time, capital flows to the euro zone increased, despite the problems of its economy growth.
From the low of February 20, the euro/dollar pair rose by 2.4% to 1.104.
This is similar to the dynamics of traditional shelter currencies, which investors buy during the periods of increasing risks in the world, such as Swiss franc and Japanese yen. Since February 20, the franc rose against the dollar by 2%, while the yen by 3.1%.
The previous weakening and unexpected strengthening, apparently, is partly due to the fact that hedge funds sell the euro and bought such high yielding currencies, this week turned deals around. According to the FX Commission's weekly futures markets data, leverage investors increased their rates against the euro in February, indicating that they are conducting carrie trades.
However, lending in euros by non-European investors in other forms (through banks and bond markets) has also recently increased. According to analysts, it affects the euro in the same way.
Another important factor is the end of the month, when some investors sum up their balance sheets and some banks get short-term loan repayment. According to the currency strategist and analyst at Societe Generale China Jacques, in many cases, the growth of the euro this week can be explained by the fact that investors close short positions in the euro.
"The market has clearly opened short positions in the euro and it is very likely that purchases are associated with their closing at the end of the month," Jax said.
In any case, next week the euro will weaken again against the dollar, analysts say. According to Rochester, the risks for the euro area are still higher than for the U.S..
"The euro is a sanctuary currency compared to the currencies of emerging markets, and for some time it played the role of borrowed currency in curry trade deals," Rochester said. But it's not clear whether that will make the euro vs. the dollar