******dollar Carry Trade******

Discussion in 'Economics' started by S2007S, Nov 15, 2009.

  1. S2007S


    For all those who are in left field and have no clue as to why stocks are rising and asset bubbles being created is because of the WORTHLESS dollar and trillions of dollars propping up everything in its way....

    Cant wait to see this unwind in due time.....

    November 14, 2009
    Dollar carry trade could herald the next global crisis, analysts warn
    Leo Lewis, Asia Business Correspondent

    The global economy could be poised for the creation of a potentially explosive dollar carry trade, analysts said yesterday.

    The trade allows investors to borrow dollars at near-zero interest rates, which they use to fund asset-buying sprees around the world, and has been possible since the collapse of Lehman Brothers last year and the extreme monetary response to its aftermath.

    The warning was issued at the Apec summit of Asia Pacific leaders in Singapore and came after a variety of assets started to display bubble-like patterns of inflation: everything from gold and copper to fine wine and Hong Kong penthouses.

    As the carry trade grows more popular it could add more downward pressure to the already falling dollar, particularly if the “carried” — borrowed — dollars are immediately sold to buy non-dollar denominated assets in China or Singapore.

    Analysts believe that it was the sudden unwinding of the yen carry trade — immense pockets of investment funded by cheaply borrowed yen — that sent the destructive ripples of the Wall Street crisis around the world last autumn.

    Carry trades, which essentially mean borrowing at low rates to fund higher return assets, make sense until markets turn sour and exchange rates shift too violently. At that point, the rush for the exit wildly exacerbates any crash. A collapse of the dollar carry trade has the potential to be particularly harmful because of its scale.

    While a few prominent financial figures have already warned of the threat of an emerging dollar carry trade, governments have steered clear of commenting on the issue until now.

    But talking on the sidelines of the Asia Pacific summit, Donald Tsang, chief executive of Hong Kong, admitted openly that the dollar carry trade had started to spread and that the prospect “scared” him.

    Washington’s response to the recession, he said, ran the risk of emulating the behaviour of Japan after its bubble collapsed in 1989 and allowing overly loose policy and a rock-bottom cost of money to inflate asset bubbles around the world. “Gyrations in financial markets and bubbles in asset markets remain ahead of us,” he added.

    Hong Kong is perhaps closer to the new asset bubbles than others: house prices there have risen 28 per cent this year and new records for land price sales have landed with thudding regularity over recent weeks.

    Behind Mr Tsang’s concerns is the fixed relationship between the Hong Kong dollar and the “greenback” — the so-called dollar peg that is the cornerstone of Hong Kong financial policy but is forcing its interest rates to be much lower than the monetary authorities would like. Hong Kong’s property inflation is being driven by mortgages that are cheaper than they should be but the authorities are limited in how they can respond.

    Observers who have warned of the emerging dollar carry trade include Nouriel Roubini, the American economist.

    He believes that the prolonged ability to borrow dollars cheaply risks planting the seeds of the next financial catastrophe. Carry traders feel more comfortable with their positions because of the Federal Reserve’s promise to keep rates “exceptionally low” for an “extended period”, he said recently.

    Also attending the Apec meeting in Hong Kong, Robert Zoellick, the World Bank president, noted the risk of allowing liquidity to flow into equity and property markets in the region.

    “In East Asia, if you start to get a strong rebound in growth, and you’ve got a lot of liquidity, there is the question of whether one could start to face asset bubbles in particular markets,” he said.
  2. S2007S


    This is still being ignored, the dollar carry trade has helped out equity markets greatly over the last 8 months, once this trade is over and done with liquidity should dry up pretty quick, remember this wont take years to unwind, something like this happens quick. Remember to much a good thing never lasts long.

    Investing With Cheap Dollars Still a Good Trade For Now

    On Thursday January 7, 2010, 1:54 pm EST

    Investors are likely to continue using cheap dollars to buy higher-risk assets in the early part of 2010, but with a potentially sharp price to pay down the road.

    The so-called "carry trade," in which deep-pocketed investors borrow low-interest US currency to buy higher-yielding assets like stocks and commodities, helped carry the stock market to more than 20 percent gains through 2009.

    Absent a drastic change in Fed policy, the trend is likely to continue for the first half of 2010-regardless of what could happen once interest rates rise and the trade unwinds.

    "The dollar is going to stay on the funding side of the carry trade equation, and carry is going to perform well as an FX strategy because risk appetite will be reasonably healthy," said Dan Katzive, currency strategist at Credit Suisse in New York. "We will get more concerned when we see valuation extremes."

    Many analysts are arguing that stocks remain reasonably valued despite the 60 percent bounce off the March 2009 lows.

    Yet there also remains concern that the Federal Reserve at some point this year will have to start raising interest rates to control growth and support the dollar.

    The fed funds rate is at an historic low of 0.14 percent, meaning it costs almost nothing for banks to borrow money, and then can lend it out at a high premium. At the same time, the dollar has perked up a bit lately but still remains low compared to other major currencies.

    The Japanese yen had historically been the vehicle of choice for the international carry trade but was replaced last year when the dollar tumbled as policymakers sought to prop up the ailing US economy with low interest rates.

    When the Fed steps in and starts raising rates again-fed fund futures are indicating the central bank will start tightening this summer-the dollar is likely to strengthen and begin taking the lustre off the carry trade.

    The worry is that investors who bought during the dollar carry trade's run will start selling to cover their positions.

    "The dollar carry trade has moved from being the layup trade in the second half of last year to being a much riskier proposition," said Nick Colas, chief market strategist at ConvergEx Group in New York. "It may still work out but it's predicated on a series of assumptions that are no longer consensus."

    Paramount among the changing dynamics is an economy growing, albeit at an uncertain pace. Most analysts are putting 2010 growth in the 3 percent range, but further injections of government stimulus money not used in 2009 could accelerate things.

    At that point the Fed will have no choice but to move in, and stock investors will face a less certain future. And the central bank could even be taken out of the equation somewhat if Treasury auctions start to meet resistance and the government is forced to raise yields to attract buyers.

    Colas said he expects the stock market to see double-digit percentage gains in the first half of the year but to stabilize once the dollar starts to strengthen.

    Others take a dimmer view of the cheap dollar strategy's demise.

    Institutional investors who can borrow large sums of cash drive the carry trade. Retail investors reap secondary and tertiary benefits from the fallout as the influx of cash to the market boosts prices.

    But sentiment polls and investment metrics indicate that retail investors had been slow to buy into the rally of the past nine months. That trend has changed in recent weeks, with a sharp jump in equity-based mutual funds and strong bullish sentiments from polls such as those conducted by the American Association of Individual Investors.

    Some strategists are afraid that the rally could be running out of gas and ready to bite those late to the party.

    "I don't think you ever have a gradual unwinding," said Cliff Draughn, president and chief investment officer at Excelsia Investment Advisors in Savannah, Ga. "Selloffs are much quicker than buy-ins. The end for greed is underweighted by the factor of fear. Fear invades your consciousness much quicker than greed does."

    The net result, he said, would likely to be a 15 to 20 percent dropoff from current stock levels to a point where the Standard & Poor's 500 could see 870 or so. While that obviously would represent a shock to investors, Draughn does not see the market retesting the lows of last March, primarily because the Fed will face political pressure to ease its way into rate cuts.

    "Frankly, I don't see (Fed Chairman) Ben Bernanke stepping in front of the rate yield curve during an election cycle in 2010," he said. "He just won't do it."

    Investors should move toward diversification with 70 percent of portfolios directed towards quality-large-cap stocks such as Johnson & Johnson (NYSE:JNJ - News) and Wal-Mart (NYSE:WMT - News) and no banks-with 30 percent towards plays on volatility, Draughn said.

    Because he sees markets moving higher before the dollar carry aggressively unwinds, ConvergEx's Colas prefers investors to be in exchange-traded funds that capitalize on selected sector moves-among them the SPDR Industrial (NYSEArca:XLI - News) and SPDR Technology (NYSEArca:XLK - News).

    Credit Suisse's Katzive said a lower dollar should be a good bet even if the Fed does make a significant move in 2010 on rates.

    "The dollar is likely to remain a lower-yielding currency through much of the year. Even if the Fed hikes by 100 basis points this year ... you're going to get the rate at a significant premium to the rest of the G10," he said. "Generically, low yields are good for stocks."