Credit Suisse's Rich Clients Sell Euros for High-Yielding Assets

  • Carry trades seen offering decent yields, minimal volatility
  • Draghi's QE is key to euro's attraction as a funding currency

Credit Suisse Group AG’s wealthy clients are seeking to exploit differences in global borrowing costs by using euros to buy the currencies of China, India and Mexico, according to the private bank’s strategist.

The Chinese yuan traded offshore, the Indian rupee and Mexico’s peso offer “reasonable” yields with minimal volatility, said Koon How Heng, senior foreign-exchange strategist at Credit Suisse’s private banking and wealth management unit in Singapore.

In carry trades, investors seek to borrow cheaply in one currency to buy those of nations with higher yields. All except four of the 42 potential trades funded in euros tracked by Bloomberg have made money since ECB President Mario Draghi said on Oct. 22 that he will investigate all options for more stimulus in December.

“Our favorite funding currency is still the euro,” Heng said in an interview. “Whenever you have a central bank that is behind you doing QE, you can have the luxury of using the currency as a funding currency.”

The strategy can add stability and predictability to clients’ portfolios amid uncertainty over the timing of the Federal Reserve’s first interest-rate increase in almost a decade, Heng said. While Credit Suisse expects the Fed to tighten policy as early as December and the greenback to strengthen, the key role of U.S. economic data in driving the central bank’s decision is set to fuel volatility in the dollar, he said.

China, India, Mexico

The currencies of China, India and Mexico are set to outperform emerging-market peers because those nations have current-account surpluses and governments that are committed to reforms, Heng said. Slumping commodity prices and slowing economic growth will weigh on most other emerging-market currencies, he said.

In carry trades, a drop in the funding currency or an increase in the target exchange rate adds to the return from the rate differential. The median forecast in a Bloomberg survey puts the euro at $1.07 at the end of the first quarter, down 3 percent from $1.1027 as of 7:10 a.m. in London.

Before Draghi’s comments last week that policy makers were looking at all tools, more than 80 percent of economists surveyed by Bloomberg predicted the ECB will eventually beef up quantitative easing. Policy options include extending stimulus beyond its current end date of September 2016, ramping up monthly purchases from 60 billion euros ($66 billion) and cutting the deposit rate.

In an interview with Italy’s Il Sole 24 Ore published on Oct. 31, Draghi said whether the central bank needs to boost its quantitative-easing program is still an “open question.” He added it’s “too early” to pass judgment on lowering the deposit rate further below zero.

“We believe they are ready to expand the monthly asset purchases,” Heng said. “There’s a lot of push back and forth but it looks it’s going in that direction.”

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