Could The Dollar Carry Trade End Abruptly And In Tears?

Discussion in 'Trading' started by ASusilovic, Dec 6, 2009.

  1. Dear Friends

    The dollar carry trade remains in vogue for as long as the dollar keeps depreciating in value and interest rates remain low. What happens when the dollar appreciates? Recently, as the US Dollar Index has improved, money has swiftly come out of the risk trade safe havens -- gold and commodities -- to which it ran to protect against a further dollar decline. As an example, gold fell more than 5%, when the dollar index improved by 1.5% on a single day!

    Given the dollar's inverse correlation with nearly all asset classes, there are many triggers for the demise of the dollar carry trade. For example, a sustained pullback in stock markets anywhere in the world -- Asia, Europe or America -- could dim the carry trade's attraction immediately as investors rush to the safe haven of the dollar. As they exit and need to meet their margin calls, the speculation in other asset classes could end abruptly. Everybody's piling into equities, bond and commodities, selling the dollar in carry trades, yet the main driver is not recovering earnings, it's the fact that prices keep going up for those asset classes.

    Not too long ago, the Japanese yen and Swiss franc, with their near-zero interest rates, were the preferred funding currencies in carry trades. What happened? Those carry trades became a nightmare for borrowers as the currencies appreciated significantly relative to their own. No matter how many players sell the dollar, it cannot reach negligible value. It makes one wonder how fast and how far the market players can short the dollar without running the risk of an unanticipated, abrupt and fast snapback in their face?

    :D :D :D
  2. Tide31


    Great post. Big dilema. Its something I have been wondering a lot about lately. IMHO after a struggle, the dollars appreciation will not necessarily mean the US equity markets demise. I thought we were seeing this on Friday, good news for equities and a large reversal in USD. Then the carry trade unwind took over and slammed the market.

    Historically, a rising dollar and increasing rates don't have to be bearish. Rising dollar is inflationary so rates have to go higher. Global investors chase US assets to take advantage of a rising dollar. Inflation will be heating up because of a good economy hence equities will be rising. I for one think that the carry trade participants will not get double-whammied and will be able to get out slowly and effectively.
  3. Rising dollar is inflationary? Do you mean strengthening dollar, or weakening dollar? Surely you didn't mean a strengthening dollar is inflationary?
  4. "Slowly" ? Did there occur a slow exit from any crowded trade in the last 3 years ? Every macro fund out there is heavily "carry trade" invested. I wouldn' t be surprised if another six sigma event occurs...
  5. Too many people are leaning on the same side of the boat in the dollar. I think we saw evidence of this with the hard sell off in gold and the EUR on Friday. Short term this is a croweded trade.
  6. The USD/JPY cross looks to be on the cusp of a multi-month rally
  7. Suss, you may get your "wish" on January 4th. :cool:
  8. Tide31


    Tx PM, what I was thinking and that sentence was totally backwards was rising dollar in past has often led foreigners to chase US Bonds as hedge against inflation back home, or something . . . Losing train of thought its Sunday night!
  9. Nazz,

    I have already highlighted this particular day in my personal calender...:p
  10. Be sure your New Years Day hangover has worn off by then. :cool:
    #10     Dec 7, 2009