Investors are starting to shift to the euro from the Japanese yen when they consider funding carry trades in emerging markets, as prospects for political turmoil in the European Union hang over the shared currency.
Carry trades involve borrowing in low-yield currencies and then buying higher-yield ones to earn the rate premium differentials. Dollar-funded strategies have suffered after Donald Trump was elected as US President on November 8. Borrowing greenbacks and buying the currencies of Brazil, Indonesia, South Africa and Turkey handed a loss of 4.4% in that time. That compares with a 0.65% decline for deals funded in euros and a 4.1% return for the yen.
Bets on riskier assets have unravelled since the US election on speculation that the president-elect’s avowed spending policies will fuel inflation and accelerate growth in the world’s biggest economy. 
The 10-year Treasury yield has surged about 60 basis points since the vote, narrowing the premium offered by developing-nation assets. All 24 emerging- market currencies tracked by Bloomberg except for the Russian rouble have since declined against the greenback.
“It’s hard to advocate yen as a funding currency; we think then yen is going to strengthen from these levels,” said Mitul Kotecha, head of Asia currency and rates strategy at Barclays in Singapore. “You can look at euro-funded carry trades but whenever carry sells you’re still going to high-yielders at a time when you have this pressure from US yields, with capital flows slowing down or even reversing.”
The yen is forecast to strengthen 2.7% by June to be the top-performing currency among 16 major peers, while the euro will weaken 2%, according to Bloomberg surveys of analysts. Some $15.5bn were pulled from emerging-market funds since November 9, according to a December 5 statement from the Institute of International Finance. 
The euro reached a 20-month low this month as the resignation of Italy’s prime minister threatens renewed turmoil for Europe amid a populist wave sweeping developed nations. France, Germany and the Netherlands are scheduled to hold elections in 2017.
Other thoughts from Kotecha, who correctly predicted that the Monetary Authority of Singapore will weaken the currency at its April meeting, include: Yen already “quite cheap,” will be boosted by haven demand amid Europe uncertainty. Barclays likes intra-regional trades using Singapore dollar to buy Indonesian rupiah, and offshore yuan to invest in the Indian rupee.
Schroder Investment Management remains flexible in using either the euro or the yen as a funding currency to buy emerging-market currencies at cheaper levels, according to Rajeev De Mello, who oversees about $11.7bn as head of Asian fixed income in Singapore. Timing will be key amid the rout in US Treasuries and as it seeks more clarity on Trump’s trade protectionist rhetoric after he vowed to scrap the Trans- Pacific Partnership.
For Oanda Corp’s Jeffrey Halley the euro is better than the yen because the Asian nation may have already reached the limits of quantitative easing as it seeks only to manage its yield curve, putting pressure on the currency to strengthen.
The European Central Bank on Thursday expanded its quantitative-easing programme to exceed €2.2tn ($2.3tn) by the end of 2017, extending the program from April at a slower speed of €60bn a month, from €80bn currently.
“Europe has to keep quantitative easing; it will go on at least until the end of 2017,” said Halley, Oanda’s senior market analyst in Singapore. “The euro is going to go lower as well because they’ve got a lot of political risks next year. People may start borrowing those euros to do carry trades.”




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