The impending decline in interest rates in Europe has made the euro a prime candidate for financing carry trades. This increases pressure on the euro.
Let’s look at what this earning scheme is briefly. Carry trade is a strategy for making a profit in the foreign exchange market due to different interest rates. In reality, it looks like this: an investor takes funds in one currency at low interest rates, converts them into another currency and places them at higher interest rates. For example, you took out a loan at 8% and invest this money at 11%. The difference of 3% is your profit. Leading and very large financial houses such as Goldman Sachs Group, Inc. and JPMorgan Chase & Co. recommend borrowing euros to buy riskier and higher-yielding currencies. Money managers Allspring Global Investments and Ninety One Asset Management advocate trading against emerging market currencies, while Allspring is also betting the euro will fall against the US dollar. By rescuing the economy and rolling back monetary policy, Christine Lagarde, admitting to serious problems in the economy, can turn the euro into something similar to what is happening with the Japanese yen. Over the past two years, low interest rates at the Bank of Japan have meant it has become cheaper to borrow the yen and sent the currency tumbling to its lowest level in decades. “Growth in Europe appears to be more volatile than anywhere else in the G-10,” said Lauren Van Biljon, portfolio manager at Allspring Global Investments. “This could create room for the ECB to cut rates in the second quarter, ahead of the US and UK.” Draw your conclusions, gentlemen, and don’t miss your opportunity to make money.
