AUD - carry trades back in style?
May 29th 2004, 7:05 am
#1
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Joined: Aug 2002
Posts: 7,613
AUD - carry trades back in style?
See this analysis from http://news.ft.com/servlet/ContentSe...=1012571727143 . If the trend continues, the carry trade currencies (incl AUD, NZD) will strengthen vs GBP.
'One story bestrode the currency markets like a colossus this week - that of the incredible shrinking dollar.
The greenback plummeted against all other major currencies, prompting fevered suggestions that the dollar could plunge back to the lows of February, when it reached an eight-year nadir against the (synthetic) euro.
"There is now speculation that the dollar may weaken back to the record London closing high of $1.2845," said Paul Chertkow, head of global currency research at Bank of Tokyo-Mitsubishi. "We are bearish on the dollar and have a six-month target for the euro of $1.32," chimed Mansoor Mohi-uddin, chief foreign exchange strategist at UBS.
The dollar's recovery since February, encompassing a 10-cent rise against the euro, was fuelled by expectations that the quickening pace of economic recovery in the US would force the Federal Reserve to double interest rate to 2 per cent by the year-end.
This, in turn, led speculators to unwind dollar-funded carry trades - which had involved borrowing cheap dollars to buy more lucrative assets elsewhere - pushing the greenback higher.
By last week most observers had concluded this trend had run its course. What they didn't foresee was that the presumption that rates will double this year would be challenged so muscularly.
Firstly, the spectre of rampant oil prices raised its head, leading some to conclude that high energy costs could derail the US recovery, militating against the need for rapid rate rises and widening the vast US current account deficit.
When that threat eased towards the end of the week, the dollar bears turned their attention to a succession of soft US data, from three weeks of disappointing weekly jobless claims to Friday's weak consumer confidence reading from the University of Michigan.
Calyon investment bank said on Friday that its economic surprise index for the US had fallen sharply this week and was now negative. "For the first time since March the US economy now delivers more disappointments than positive surprises," said Calyon's Kristjan Kasikov.
"More significantly, the US is currently the only major economy that delivers negative surprises."
With a correlation of 82 per cent between this index and the performance of the dollar against the euro, the greenback's slide was unsurprising, particularly with the likelihood of the Fed raising rates next month falling back from 90 per cent to 85.
As a result, the dollar slid 2.1 per cent to an eight-week low against the euro of $1.2209, 2.5 per cent to a six-week low of $1.8326 versus sterling, 2 per cent against the yen to a three-week low of Y110.20 and 2 per cent to a three-month low of SFr1.2517 versus the Swiss franc.
Mr Mohi-uddin feared there could be worse to come, arguing that, so far, the dollar's decline was due to selling by trend-following hedge funds, which slavishly follow technical models.
Thus there is scope for a further wave of selling if other market players are drawn in by weakening dollar fundamentals - such as poor non-farm payrolls data next Friday. "The structural reasons for being short the dollar are still in place," he added. "The US does not want to see a strong dollar ahead of the election."
Not everyone agreed, however, with Marc Chandler at HSBC arguing that the fact the dollar has been undermined by speculative flows, rather than real money, means "the market is more prone to profit taking".
The Swiss franc was a star performer, recording an 11-month high against the euro of SFr1.5294. The safe haven Swissie usually outperforms when risk aversion is a dominant theme, but that was not the case this week.
Instead the Swissie's strength was attributed to a growing belief that Swiss interest rates will rise this year, with the eagerly-watched KOF leading indicator leaping to a three-year high on Wednesday.
"The European retail base is very long euro/Swiss franc and has done well for a year-and-a-half. Now that is beginning to capitulate," said UBS' Mr Mohi-uddin.'
'One story bestrode the currency markets like a colossus this week - that of the incredible shrinking dollar.
The greenback plummeted against all other major currencies, prompting fevered suggestions that the dollar could plunge back to the lows of February, when it reached an eight-year nadir against the (synthetic) euro.
"There is now speculation that the dollar may weaken back to the record London closing high of $1.2845," said Paul Chertkow, head of global currency research at Bank of Tokyo-Mitsubishi. "We are bearish on the dollar and have a six-month target for the euro of $1.32," chimed Mansoor Mohi-uddin, chief foreign exchange strategist at UBS.
The dollar's recovery since February, encompassing a 10-cent rise against the euro, was fuelled by expectations that the quickening pace of economic recovery in the US would force the Federal Reserve to double interest rate to 2 per cent by the year-end.
This, in turn, led speculators to unwind dollar-funded carry trades - which had involved borrowing cheap dollars to buy more lucrative assets elsewhere - pushing the greenback higher.
By last week most observers had concluded this trend had run its course. What they didn't foresee was that the presumption that rates will double this year would be challenged so muscularly.
Firstly, the spectre of rampant oil prices raised its head, leading some to conclude that high energy costs could derail the US recovery, militating against the need for rapid rate rises and widening the vast US current account deficit.
When that threat eased towards the end of the week, the dollar bears turned their attention to a succession of soft US data, from three weeks of disappointing weekly jobless claims to Friday's weak consumer confidence reading from the University of Michigan.
Calyon investment bank said on Friday that its economic surprise index for the US had fallen sharply this week and was now negative. "For the first time since March the US economy now delivers more disappointments than positive surprises," said Calyon's Kristjan Kasikov.
"More significantly, the US is currently the only major economy that delivers negative surprises."
With a correlation of 82 per cent between this index and the performance of the dollar against the euro, the greenback's slide was unsurprising, particularly with the likelihood of the Fed raising rates next month falling back from 90 per cent to 85.
As a result, the dollar slid 2.1 per cent to an eight-week low against the euro of $1.2209, 2.5 per cent to a six-week low of $1.8326 versus sterling, 2 per cent against the yen to a three-week low of Y110.20 and 2 per cent to a three-month low of SFr1.2517 versus the Swiss franc.
Mr Mohi-uddin feared there could be worse to come, arguing that, so far, the dollar's decline was due to selling by trend-following hedge funds, which slavishly follow technical models.
Thus there is scope for a further wave of selling if other market players are drawn in by weakening dollar fundamentals - such as poor non-farm payrolls data next Friday. "The structural reasons for being short the dollar are still in place," he added. "The US does not want to see a strong dollar ahead of the election."
Not everyone agreed, however, with Marc Chandler at HSBC arguing that the fact the dollar has been undermined by speculative flows, rather than real money, means "the market is more prone to profit taking".
The Swiss franc was a star performer, recording an 11-month high against the euro of SFr1.5294. The safe haven Swissie usually outperforms when risk aversion is a dominant theme, but that was not the case this week.
Instead the Swissie's strength was attributed to a growing belief that Swiss interest rates will rise this year, with the eagerly-watched KOF leading indicator leaping to a three-year high on Wednesday.
"The European retail base is very long euro/Swiss franc and has done well for a year-and-a-half. Now that is beginning to capitulate," said UBS' Mr Mohi-uddin.'
May 30th 2004, 2:04 am
#2
The Outback Beast
Joined: Mar 2004
Location: Perth
Posts: 292
Re: AUD - carry trades back in style?
OK but wot does it mean in layman's english, Is it good for £-AUD$ or what, can't make head or tail of it, as it is 3am and after copious amounts of red wine 
May 30th 2004, 5:29 am
#3
Banned
Thread Starter
Joined: Aug 2002
Posts: 7,613
Carry trade simply put is when you borrow in a currency with low interest rates and convert/ invest in currency with high interest rates. So: borrow in Japanese yen, USD etc and buy AUD, NZD etc has been common recently.
GBP is a bit caught in the crossfire.
Result: pushes up the AUD, NZD - you get less AUD for your GBP.
GBP is a bit caught in the crossfire.
Result: pushes up the AUD, NZD - you get less AUD for your GBP.
