Should I Buy Euro??

Eurozone vs. United States, where should I invest in?

Fund managers at Aberdeen Asset Management and Pinebridge Investments expect general currency to weaken further. This is because the factors that have pushed the euro lower against the dollar, such as carry trades still exist. Even after concerns about the coronavirus have subsided and the full economic impact of the epidemic on China has been digested, it may still be difficult for the euro to avoid a continued decline in the pursuit of yields.

This is also evident in the options market, where traders are beginning to short. Demand for euro put options is at its highest since September, with some traders saying the euro could fall below $ 1.07. Kieran Curtis, Aberdeen's head of investment in London, said, "The problem with long positions in the euro is that because of negative leverage. You need to make it look good before it starts to make money. I am very confident that nothing can reverse the situation immediately. "

The European Central Bank's negative interest rates and its practice of buying corporate bonds in the domestic market have forced European investors to turn to euro-denominated bonds or dollar-denominated assets issued by emerging market borrowers in search of positive returns. This demand is unlikely to disappear any time soon as the yield differential between the US and Germany's sovereign bonds is close to 2 percentage points. For dollar investors, this is a chance to kill two birds with one stone. If they buy emerging market bonds denominated in euros, not only will they get positive returns, but they will also reap returns when they hedge their euro exposure.

This is because the currency forward market is determined by interest rate differences: the difference between the cost of borrowing between the euro and the dollar means that short euro positions help capture this difference. "When you hedge your euro exposure at a three-month rate, the other party will pay you," Curtis said. "Once you add this income, you get a higher net return on the dollar."

This situation is unlikely to change. The relevant policy measures of the European Central Bank and the Federal Reserve seem to be stable for at least the next 12 months. According to traders' bets, neither bank is likely to raise interest rates. Petr Krpata, chief currency and interest rate strategist at ING Groep NV in Europe, the Middle East and Africa, said, "Because the Fed has a high threshold for substantial easing, the U.S. dollar versus the Euro should remain Its interest rate advantage. "

Bank of America global research strategists Kamal Sharma and Myria Kyriacou wrote in a report that the foreign exchange market is increasingly driven by strong cross-border capital flows rather than fundamental factors such as valuation and unexpected economic performance.

"The issue of US ‘Reverse Yankee‘ bonds and Japanese investors' dumping of European assets and their switch to the US have been the focus of investor attention in recent months," they wrote. "Since central banks have not shown a willingness to return policies to a normal basis, the channel of capital flows may continue to dominate, thereby reducing concerns about valuation imbalances." 

However, UBS Group AG says that long-dollar trading is too risky for euro investors. Mark Haefele, global chief investment officer at UBS, said in a report this week that the dollar ’s future decline will outweigh the yield advantage. He believes that the US's growth advantage over Europe has gradually disappeared, and he expects the euro area's economy to revitalize this year. Work will replenish inventory, domestic demand will pick up, and international trade will pick up.

However, Anders Faergemann, a senior portfolio manager at Pinebridge Investments in London, said that because the coronavirus threat is still emerging, the full impact on China's economy has not yet been reflected in market prices. He said that from a fundamental and technical point of view, the euro may fall again. "It's still vulnerable."

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