Monday, September 29, 2014

Strong dollar is unwinding the "carry trade"

Investors make money by borrowing in dollars at low interest rates, selling dollars and buying the foreign currency to invest in high interest foreign debt (mainly government debt). 

But what happens when these investors expect that the gain they make by taking advantage of the interest rate differential falls below the loss they expect when they have to sell the foreign currency to buy dollars to pay back the loans?  

They get out before before the bubble bursts:
Several analysts sense danger. “The carry trade strategies are finally cracking,” said Luis Costa, currency strategist at Citi bank. “The market has been so flooded with liquidity and interest rates have been so low for so long but this is turning now.” 

...The headwinds eviscerating the carry trade are reinforced by a robust outlook for the US dollar that derives from three enduring trends: the US economy is recovering strength, boosting the greenback’s attractiveness; the US Federal Reserve is poised to end its programme of quantitative easing in October, tightening dollar liquidity; finally, the European Central Bank has begun a dovish phase of monetary policy, enhancing the dollar’s outlook relative to the euro.

I put this in the "bubble" category because it is the expectations that drive the changes.  


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  3. Honestly speaking I don’t prefer to do carry trades since I am a short term trader, so for me it does not matter if the dollar stays strong or become weak, but of course I do need to analysis to go with the trend even for scalping, it’s very risky way to work but due to having OctaFX broker’s support due to their small spread of just 0.2 pips, it is seriously helpful and allows me to be trading with complete control and ease.