23/10/2015 07:21 AST
European Central Bank President Mario Draghi has given new life to an investment strategy that uses euros at near-zero rates to buy currencies with higher yields.
All except two of 43 potential carry trades funded in euros tracked by Bloomberg have made money since Draghi on Thursday left little doubt he’s ready to add monetary stimulus to boost a flagging economy. His stance pushed the euro down versus the dollar and yen, intensifying speculation the Bank of Japan may be forced to follow suit, while the Federal Reserve will delay tightening monetary policy, according to National Australia Bank Ltd.
“We will see the increased use of euro as a funding currency, but the BOJ may do enough to make sure it’s not at the expense of the yen,” said Ray Attrill, co-head of currency strategy at National Australia Bank in Sydney. “If the Fed is now going to be on hold for longer, you’re going to have the dollar, euro and the yen all acting as funding currencies in varying degrees.”
The shared currency fetched $1.1117 as of 12:10 p.m. in Tokyo, after tumbling 2 percent Thursday, the most since Jan. 22. It bought 134.13 yen from 134.07 in New York, heading for a 1.1 percent weekly decline.
Euro Shorts
The premium for three-month options to sell the euro against the dollar over contracts allowing for purchases jumped to 1.41 percentage point on Friday, the most in three months.
The best returns from euro-funded trades have been 4 percent from the New Zealand dollar and the Colombian peso since Oct. 21, the data show. Stimulus tends to weaken a currency by expanding the monetary base.
NAB’s Attrill expects the euro to weaken further against the New Zealand dollar, provided the smaller economy’s central bank doesn’t lower its benchmark rate next week. The euro’s move against the yen will depend on the BOJ’s policy decision on Oct. 30, he said.
Reading Draghi
There was little sign of the moves to come before Draghi’s speech, when the euro was down just 0.2 percent against its U.S. counterpart and barely reacted to the ECB holding its main interest rate at 0.05 percent and its deposit rate at minus 0.2 percent, as predicted by economists.
Bond purchases, originally due to end next September, will continue until the ECB sees a sustained increase in the inflation outlook, Draghi told reporters on Thursday. Policy makers also discussed a further cut to the bank’s negative deposit rate, he said.
Thursday’s euro declines saw Draghi repeating his trick of May 8, 2014, when he sent the currency tumbling from a 2 1/2-year high versus the dollar by saying he was ready to ease policy. Similarly, after the ECB’s last meeting that ended Sept. 3, he revamped the 1.1 trillion-euro ($1.2 trillion) QE plan and sent the single currency to its lowest level in two weeks.
New Zealand’s dollar climbed for a second day versus the U.S. currency as demand for the nation’s higher-yielding assets increased. Swaps show a 72 percent chance the central bank will maintain its key rate of 2.75 percent, the highest among Group of 10 currency nations, at a meeting Oct. 29.
The New Zealand dollar is being “driven by prospects of increased liquidity,” said Sam Tuck, a senior currency strategist at ANZ Bank New Zealand Ltd. in Auckland.
The kiwi jumped 0.8 percent to 68.44 U.S. cents, heading for a fourth weekly gain, the longest winning streak since February. It rose 0.7 percent to NZ$1.6242 per euro, adding to a 3.4 percent advance on Thursday, its biggest gain since 2000.
Bloomberg
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