Government stimulus may have revived the old Yen carry trade, whereby money is borrowed in Japan at low interest rates and invested elsewhere for higher returns to capture a spread.
Low interest rates in Europe might be making a Euro carry trade more popular also.
But wasn’t the carry trade for a low volatility world? It may be a bit premature to return to old bull-market habits. Markets going forward could be choppier than expected and reverse recently successful cross-currency bets. This would be especially true if we hit a slow-growth deflationary scenario in which commodities prices would likely collapse.
WSJ: While precise indicators on the carry trade are hard to come by, analysts at Deutsche Bank say they see money moving back into the Brazilian real, a bellwether for the carry trade given Brazil’s history of high interest rates. As of mid-August, investors had a net $4 billion in bearish bets on the currency, down from $12 billion in early March. Meanwhile, the real has risen 28% against the U.S. dollar since the end of February.
Many of the carry trades are part of broader bets on a global economic recovery, analysts and investors say. Some investors are putting their borrowed yen and dollars into assets in Australia, a large commodity producer that stands to benefit from an economic rebound in one of its key customers, China. Since the end of February, the Australian dollar has risen 29% against the U.S. currency.
Any mention of deflation must be pretty unnerving for bets borrowed in yen and sitting in commodity currencies…
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