Market backing zero interest rate currencies? – BBH

By FXStreet Analysts at Brown Brothers Harriman explained that the conundrum that everyone is wrestling with is the euro and yen’s strength given their negative interest rates and prospect for even lower interest rates.

Key Quotes:

“The divergence of monetary policy, even if the Fed is on hold for the rest of this year and next, should be dollar-positive.

We have tried making sense of what is happening by separating the developments into two buckets. The first bucket, and what we think is the medium and long-term driver is the divergence of monetary policy. The German and Japanese yields through eight or nine years are negative. Positive returns are offered in the US. This creates an incentive structure that favors the dollar.

However, something has erupted in recent weeks that has overshadowed these flows. This is the second bucket. It has to do with market positioning. The euro and yen have been used to purchase other assets. This is because the cost of borrowing was low or negative and the currencies were weak or falling. As investors liquidated the assets due to changed views or driven by money management considerations, the funding currency had to be bought.

Another part of this …read more

Source:: FX Street