Euro: Policy divergence and carry flows – BNY

BNY’s Geoff Yu says iFlow Carry is beginning to resemble its 2023 upswing. Neutral positioning in carry currencies, including those funded in the dollar, leaves room for exposures to rebuild. G10 FX attracted broad inflows, while EM FX selling was led by HUF, ZAR and KRW.

Carry rebuild and G10 inflows

"iFlow Carry resembles the heyday of 2023. In June, we highlighted that iFlow Carry had moved into statistically significant negative territory, which could signal improved risk appetite ahead. That analysis was based purely on flows, and we continue to take the view that a period of positive significance, where flows align with yield, is possible."

"Neutral holdings create room for carry to rebuild. Because carry currencies offer high yields relative to funders, including the dollar, their holdings stance usually remains in positive statistical significance. The group rarely stays neutral for long unless risk conditions are exceptional."

"Putting this view into practice means that carry can broaden beyond Latin America FX – the only region which has held onto positive holdings through the year. We favor selective EM APAC high-yielders where balance-of-payments relief provides support for real rates, and use EMEA duration as the cleaner expression where FX remains constrained."

"Flows diverged across regions. G10 currencies attracted broad inflows, while EM FX saw moderate selling, led by HUF, ZAR and KRW."