Eurozone Recovery Favors Carry Trades Over Stronger Currency
BNY's Geoff Yu believes that while the Eurozone is experiencing growth and inflation risks, investing in the Euro (EUR) may not be the best way to express this view. According to Yu, strong industrial data and fiscal support favor European assets, but weak demand, European Central Bank policy-error risk, and a rich EUR valuation weigh on the currency.
Yu points out that the recovery is not yet broad-based, citing declining German services, weakening confidence, and easing output-price inflation. He also notes that while inventories, defense, and data-center investment are supporting industry, demand and core inflation remain insufficient to justify sustained EUR appreciation.
The expert recommends using the EUR as a funder for carry trades instead of outright EUR positioning. He argues that cross-border hedges sit nearly 60% below their one-year average, leaving investors underhedged on Eurozone assets. With the EUR rich and its rate differential against USD still negative, currency hedging is expected to rise even if allocations to Europe continue.