WOULD YOU LIKE A CARRY TRADE WITH THAT?
by ilene - November 20th, 2009 1:43 pm
WOULD YOU LIKE A CARRY TRADE WITH THAT?
Courtesy of The Pragmatic Capitalist
This excellent guest contribution, in response to Annaly Capital’s comments, comes from our friends at the PazzoMundo site:
The ‘carry trade’ is in the paparazzi’s sights. Have a look how it is faring on Google Trends:
It’s latest incarnation is via the USD. And as David Rosenberg points out – it looks like the world’s reserve currency is being used to fund just about every asset beyond cash on the risk spectrum.
The U.S. dollar has become a huge ‘carry trade’ vehicle for all risky assets. Historically, there is no correlation at all between the DXY index (the U.S. dollar index) and the S&P 500. In the past eight months, that correlation is 90%. Ditto for credit spreads — zero correlation from 1995 to 2008, but now it has surged to 90% since April. There was historically a 70% inverse correlation between the U.S. dollar and emerging markets, such as the Brazilian Bovespa, and that correlation has also increased to 90% since the spring. Even the VIX index, which historically has had no better than a 20% correlation with the U.S. dollar, has now sent that correlation surge to 90%. Amazing. The inverse correlations between the U.S. dollar and gold and the U.S. dollar and commodities were always strong, but these too have strengthened and now stand at over 90%.
My sense is that with it’s rise into public awareness, we are heading into the final throes of USD weakness. For example, when someone like Felix Salmon writing for Reuters does a survey of “How US investors can play the carry trade” that’s got to be a flag. And when phrases like ‘the gimme trade of the century’ are used (Annaly via TPC) in the same breath as describing it’s dynamics – the risk that complacency has set in is pretty darn high.
Think about it – the (currency version of the) carry trade says that you can borrow cheap in USD, sell those freshly minted dollars and buy into a higher yielding currency. The assumption is that the USD will continue to fall – so that in addition to the yield pick-up, you make a capital gain when you buy your…