Key Highlights

• Exogenous factors supporting EUR against ECB shift
• BI surprise could herald end of ASEAN’s yield perceptions
• Funding positions remain solid but profitability impact deepening

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ECB pressuring EURUSD but pair not pushing into outright selling yet

EXHIBIT #1: EURUSD DAILY AND QUARTERLY SMOOTHED FLOW

_Source: BNY

Our take

Until yesterday, it had become increasingly apparent that markets could not afford to fully price out any chance of a rate cut at next week’s decision amid the re-emergence of an easing bias amongst ECB Governing Council members. EURUSD price action aside, our flows show a material pick-up in sales over the past few weeks (Exhibit #1), to the extent that outflows in the pair are now the main source of support for the dollar. However, as much as policymakers and asset allocators are uncomfortable with current valuations, headlines regarding the future of Fed Chair Powell continue to highlight the risks for dollar positions as well. Even if EURUSD strength from current levels is damaging to European equity holdings, which have been the lion’s share of increased allocations, the pair remains the only liquid option to truly “action” dollar diversification. Unlike prior cycles, dovish surprises from the ECB are no longer sufficient to push EURUSD towards lower ranges.

Forward look

Our data indicate that while EURUSD momentum is waning, there appears to be hesitation in pushing for outright sales. On a quarterly smoothed basis, the market shifted towards net buying of EURUSD in late February as the European defense theme picked up and has not looked back. In addition, recent sales have pushed cross-border holdings – which are underheld positions reflecting hedges on assets – to around 25% above the average over the past year. While nowhere near as extreme as levels seen towards the end of 2025, adding to such positions is less straightforward unless there is a clearer case in rate differentials up ahead. On balance, we continue to see EURUSD on the 1.15 handle heading into next week’s decision, but large shifts are possible subject to external developments.

ASEAN no longer considered a high-yielding region

EXHIBIT #2: DAILY FLOWS YEAR TO DATE IN AUD AND NZD

_{Source: BNY}

Our take

Bank Indonesia’s surprise cut yesterday has all but signaled the end of ASEAN being viewed as a region to pursue high nominal rates for carry purposes. Due to softer demand in China and tighter fiscal management, neutral rates were never going to match that of the stronger carry regions of Latin America and EMEA. Nonetheless, strong disinflation or outright deflation associated with North Asia was not in play either, which allowed these currencies to enjoy a small carry buffer, or at least limit underheld positions. IDR was most notable in this respect, being consistently the most consistently overheld higher-yielding name in APAC. However, our flows show that since easing (expected in Malaysia and the Philippines) started in late June, flows have been subdued and in IDR and MYR’s cases have turned into outright sales. Tariff developments may have played a role as the U.S. responds forcefully to transshipments.

Forward look

As iFlow often shows, when a central bank’s policy bias shifts materially, a new range in holdings will likely follow. Given the lack of growth support externally and export strength, the outlook for growth across the region is increasingly challenging. Bank Indonesia reiterated that it intends to go “all out” in encouraging bank lending and economic growth, and is leaving options open for further easing, though we doubt the central bank will be in a rush to do so. Real interest rates remain high, but the intent to loosen financial conditions is clear. Other economies in the region cannot afford significant divergence in financial conditions against Indonesia either, so as a bloc, the attraction of real rates has diminished. We do not expect a significant shift towards underheld by IDR, while holdings in other regional names are already soft. Nonetheless, the message is clear and if the data disappoint, we expect BI and its peers to fully utilize any remaining room for maneuver. This is also not the bloc where we expect the dollar’s long-term valuations to adjust, especially with the dollar often being on the funding leg of carry plays in the region.

Funding status still proving difficult to dislodge

EXHIBIT #3: CURRENT HOLDING VS. PROFITABILITY OF EXPORT-BASED FUNDING CURRENCIES

_{Source: BNY}

Our take

iFlow Carry continues to have positive statistical significance, even though there are signs of strain amongst high yielders. Given part of the process of “crowding into” the carry trade required significant levels of selling of low-yielding currencies, a reversal of many of these names is necessary for the process to unwind in earnest. Of the dozen or so currencies we define as carry-based, i.e., generating significant surpluses due to manufacturing exports, only SGD and JPY are overheld (Exhibit #3). Yet, currencies with high potential for an unwind such as CHF, SEK and KRW are not particularly strongly underheld either. The general setup for carry unwinding led by stronger funding currencies is favorable, but catalysts are still lacking.

Forward look

There are plenty of potential macro catalysts in play for risk-aversion, but we have seen how the market has become increasingly inured to such news, mostly because a reversal of positions is often the case – yesterday’s Fed-driven developments being the latest example. However, with global central banks generally moving towards an easing bias, the opportunity cost of owning such low-yielders will only narrow, and the potential valuation gains in the event of a longer-term balance of payments adjustment increasingly difficult to ignore. The fact eight out of the 12 currencies are now unprofitably underheld should serve as a warning to asset allocators that this is no longer a “normal carry environment,” whereby dollar longs would generally remain profitable. We are cognizant that official or semi-official independence will always be a hindrance to funders realizing their full valuation potentials but profitability may be increasingly painful up ahead. We continue to see a significant shift towards carry unwinding in the coming weeks.

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