The Euro and its Rejuvenation
The Euro has emerged into a new phase, according to the Deutsche Bank. Competing with the Japanese Yen, it has become the currency that everyone yearns to borrow, but no one wants to own it. According to George Saravelos, the European currency is predicted to be trading at the rate of 1.4USD at the moment, as investment flows seem to be going uphill. However, Europe has become a large borrower to the rest of the world, which marks a crucial end to the currency’s popularity. Loans from the Euro-zone banks to non-European resident have reached levels that have not been seen since 2008. On the other hand, non-Euro banks have picked up exponentially.
According to Mr Saravelos’s financial report, “No one wants to hold euro cash as an asset any more, but everyone wants it as a liability. As a result, the Euro-zone is emerging as the new global provider of liquidity to the international financial system.”
Along with lower volatility in the Euro exchange rate when traders are eager to take on a risk, the European currency also faces disruption when the financial markets fluctuate.
What is a Carry-Trade?
A carry trade is a currency where investors and traders utilize it to borrow in a low yielding currency pair, in order to buy assets that provide higher rates of return and revenue.
“The euro is likely to exhibit increasing ‘carry trade’ behavior where depreciation is gradual but appreciation pressures sharp as positions are unwound,” Mr Saravelos stated. There have been various examples that prove that Euro is turning into the world’s newest carry-trade. This includes, but is not limited to, the European exporter voting to any return from its sales in US dollars, and putting them in American banks to prevent reaching bottom or negative interest rates, which would occur in the Euro-zone bank.
Another example would be that a US company has taken advantage of the cheapness of the European currency, by issuing bonds in the currency then converting the returns into dollars.
“European banks have opened their lending spigot to the rest of the world again,” Mr Saravelos wrote. “Europe is becoming the world’s new carry trade.”
This leaves the rest of the world anxious to borrow the European currency but refuses to become an owner, since the currency has been easy to trade with but it is not an asset to acquire.