The many trilions of dollars of stimulus is not only supporting carry trades, hurting negative-yield currencies like the euro, but it’s also fueling gambling which is underpinning demand for EUR / USD.
Since May 2020 the euro has gained over 11% versus the dollar but has fallen by the same margin versus Mexico’s peso and dropped 16% against South Africa’s rand.
Mexico’s peso and South Africa’s rand are two of very few higher yielding currencies left to invest in, while the euro which is undermined by negative interest rates and is the most liquid currency is an ideal way to fund MXN and ZAR longs.
The euro and EUR / USD’s paths will likely diverge further.
Volatility has dropped to pre-pandemic levels which will fuel demand for the higher yielding assets that return profits during the quiet period lower vols imply.
On the other hand a substantial paring of EUR / USD longs this year has occurred without impacting a powerful technical uptrend.
Freed of their weight, EUR / USD has resumed its rise.
