Carry trades get a fresh boost from ECB's loose monetary policy

For all the uncertainty around the European Central Bank's extraordinary monetary policy, one thing is for sure: it'll be good for carry trades.

If an asset has a higher yield than euro-denominated ones, and in today's world many, many do, it will benefit from increased flows from investors borrowing in euros and making bets elsewhere. Notable beneficiaries will be emerging markets, but the fun hardly stops there.

The ECB on Thursday made a series of moves to react to weakening growth in the euro zone. Three policy rates were cut by 10 basis points, leaving the deposit facility at negative 20 basis points, in a move the ECB signalled was the end of the road for conventional easing.

Also unveiled was an asset-backed security purchase programme, to be launched and detailed next month and to be accompanied by a similar plan to buy covered bonds. All of this apparently moves us closer to outright quantitative easing, with sovereign bonds being bought on the secondary market.

This all was probably justified, and might even work. Or help, at any rate, though the list of provisos and limitations to monetary policy effectiveness in the euro zone is long.

"To the extent that at least some part of that money will head abroad, the turbo-charged easy money will likely invigorate euro-funded carry trades," Citigroup foreign exchange strategist Valentin Marinov wrote in a note to clients.

"As a result, foreign investors buying euro-denominated assets would be hedging their downside risk more aggressively. Last but not least, stronger domestic demand in the euro zone on the back of the ECB measures could lead to deteriorating external imbalances and weaken the euro."