Devlauing dollar and carry trade!

Discussion in 'Economics' started by Nashequilibrium, Feb 29, 2008.

  1. Since Bernanke has given the green light on the dollar appreciation, seeing it as a good thing and more rate cuts to come, those who are still playing the carry trade, how are you holding up?

    I expected to see more unwinding as we did in Feb, 07 but euro seems to gaining up against the dollar and dropping very slowly against the yen. It will be interesting to see how the carry story plays out since the new story is stagflation resulting in dollar depreciation and interest rate cuts.
  2. gkishot


    As far as I know dollar does not take part in carry trade. Therefore carry trade movement has more to do with the appreciation of yen than devaluing of dollar.
  3. Your assumption is incorrect, the eur has also been a carry trade play and its interest rates didn't even go up as high as the usd's. The others would be nzd,aud,gbp and a couple of emerging markets but since EM risk is very high i think most may have gone to aud,nzd and usd.

    I am already seeing some effects in the fx market, i think yen being at around 103.00
    is going to cause a lot more fx volatility.
  4. gkishot


    Carry trade contains only gbp, nzd, and aud on the long side.
  5. Therefore your stance is that there has been no usd/yen carry trade the last couple years??
  6. gkishot


    No usd. My guess is that it is because USD is used as collateral and by doing so it by itself collects the short-term ( T-bill ) interest.
  7. USD/TRY is the new carry trade king.
  8. big shock... I mean do you really think this is new or has it not appeared on CNBC

    this is how to stave off revolution and riots....

    well, for a time...
  9. Carry traders beware: The end of yen weakness (for now….)

    In the past week, yen watchers and carry traders have seen the spectacle of the yen strengthen from over Y108 to around Y103 to the dollar. Now, Tohru Sasaki, JPMorgan’s savvy currency strategist in Tokyo, predicts the yen will reach Y98 by the end of the month.

    What’s going on? Factors in a lower USD/JPY, according to Sasaki, include higher oil prices, option market trends and lower US real interest rates - the last being a particularly strong factor in the yen’s surge against the dollar. Indeed, he says, the combination of lower nominal rates and higher inflation has pushed down real US rates to drive an overall dollar decline.

    Risks are that a further US nominal rates decline (resulting from weak economic data) and rising inflation fears (from Fed easing and commodity prices) could drive further dollar weakening and lead USD/JPY lower.

    The dollar has been in trend decline since 2002 on structural pressures from the US current account deficit. Capital inflow into the US has acted as an offset, but the sharp decline in US interest rates could make dollar assets less attractive and reduce capital inflows, leaving the dollar increasingly exposed to pressures from the current account shortfall.

    To be sure, adds Sasaki, buying could intensify should the US slowdown sharply affect other economies - although recent activity data outside the US have been strong; including the UK January retail sales, Belgium’s February BNB Business Survey, Germany’s February IFO business sentiment survey, German unemployment in February, and Australian private-sector capital investment in 4Q.

    These show other major economies remain resilient even as the US economy slows, which should further weigh on US capital inflows and the dollar.

    As for the yen, Sasaki in a note on Monday calls the end (for now) to yen weakness. The recent USD/JPY decline “goes beyond the mere impact of dollar weakness and signs are that drivers for yen strength are increasingly gaining significance”.

    With the rise in global financial volatility and weaker business sentiment following the subprime meltdown, the yen is no longer trading as a weak funding currency as it did between 2005 and the 2007 first half. The underlying drags on yen performance against other currency crosses are becoming less significant, while continued dollar weakness will drive further downside on USD/JPY.

    So what of the carry trade? A lot of unwinding has been going on but much more is to come, in Sasaki’s view.

    The yen carry trade dynamic and trade and capital flows are moving “increasingly in favour of yen strength”, and the unwind of yen carry trades have not yet come to an end. Japanese retail investors still hold a few trillion yen of short yen positions via FX margin trading
    accounts and there still remains a significant amount of outstanding yen-denominated home loans abroad.

    Furthermore, some Japanese importers have hedged their exposure for several years and some exporters have held their revenue in overseas in foreign currencies, both in the view of benefiting from yield differentials between Japan and foreign countries. Risks are that the main driver of USD/JPY decline could quickly shift to outright yen buying and yen strength (away from dollar weakness) as yen carry trades unwind.

    Importantly, even should investors not unwind their short yen carry positions, upward pressure on the yen could nonetheless gain dominance in the absence of yen-selling for new carry trades.

    But expect downside USD/JPY momentum to ease as the spot rate breaks below Y100, warns Sasaki.

    Japanese investors’ foreign currency investments through FX margin accounts and foreign currency-denominated assets via investment trusts represent a structural change that is unlikely to reverse easily. Regardless of yen strength, retail investors retain easy access to foreign currency trading and investments via the internet and mobile phone platforms, and can easily invest in investment trusts that are readily available and marketed at banks and post offices.

    Indeed, Japanese retail investor risk appetites for foreign currency investments are likely to regain traction as USD/JPY breaks below Y100.

    For the very short-term, some may argue that USD/JPY will bottom in early March and then rise later in the month. This stems from the historical performance of USD/JPY.

    That said, Sasaki emphasises that the dominant drivers now in USD-JPY trade are real US interest rates, oil prices, credit concerns and option market trends.

    In addition, the fundamental backdrop of carry trades driving USD/JPY moves over the past several years has also changed, suggesting weaker relevance of historical seasonals.

    Further out, Sasaki expects the US economy to start recovering in the second half of the year and the Fed to start raising rates in the 2009 first quarter. As signs of US economic recovery emerge and as expectations of Fed hikes strengthen, the dollar is likely to be supported to trigger a USD/JPY rebound into the 2008 second half. However, the rebound is likely to be limited as yen strength is likely to mitigate the impact of a dollar rebound. For now, however, it’s enough to say: the yen is no longer a “super-weak currency” as seen between 2005 and mid-2007.
  10. They only addressed USD/JPY and not the EUR/AUD/NZD pairs with JPY.
    #10     Mar 3, 2008