STOCK MARKET WATCH -- Monday, 8 September 2014

[Demeter]

18. Euro Path Set as Lower Rates Invigorate Carry Traders

http://www.bloomberg.com/news/2014-09-05/euro-path-set-as-lower-rates-invigorate-carry-traders.html

The euro, even after falling to its lowest levels since mid-2013 following the European Central Bank’s interest-rate cuts yesterday, is poised to get even weaker based on differences in global borrowing costs.

Record-low rates in the euro zone will probably encourage traders to borrow in the region and invest the proceeds in economies with higher-yielding assets. All except one of the 44 potential carry trades funded in euros tracked by Bloomberg made money yesterday after ECB President Mario Draghi pushed the deposit rate further below zero, and said he would expand the money supply by purchasing asset-backed securities.

The latest decision by the ECB “cements the euro’s position as a funding currency,” Valentin Marinov, Citigroup Inc.’s London-based head of European Group of 10 currency strategy, said by phone yesterday. “What’s important is that the ECB is the first major central bank which is not only pumping money into the economy, but also penalizing banks for holding it. That means they will have to buy other assets, meaning some of the cash will leave the euro zone in euro-funded carry trades.”

Citigroup is joined by Pioneer Investment Management Inc. in recommending trades in which investors sell the euro to buy currencies of nations with higher rates. Jens Nordvig, a managing director of currency research at Nomura Holdings Inc., trimmed his forecast for the euro to $1.27 by month-end...

BLOWBACK