"The rise in eurozone bond yields has caused the EUR’s status as a funding currency to fade in recent weeks and the JPY to overtake as the favoured currency for the market to sell, especially as a funder for long USD positions. This switch in focus has caused EURJPY to rise 10% over the past two months, reaching its highest level since January earlier this week.
The EUR should re-emerge as the main funding currency.
i. The rise in the EUR in recent weeks has corresponded to the rise in eurozone bond yields. Our interest rate strategy team highlight that the rise in eurozone yields is likely to be nearing an end.
Firstly, German bond yields are now much closer to model gauges of ‘fair value’ following the bond sell-off.
Second, the net supply picture is better for European
bonds as we move into the summer months and expect better performance
ahead (Chart 1). We expect a decline in yields over the months ahead to
encourage EUR-funded carry trades to be re-established.
ii. Our Positioning Analysis indicates that short EUR positioning is at light levels with a score of -10 (out of -50), having reached -4 last week (its lightest level since the start of the year). As such, there appears to be substantial scope for short EUR positions to be restored
