Skip to main content

Reverse Carry Trade, Part I

Image result for Vincent Cignarella

I'm not sure I understand this, or agree with Bloomberg's analysis, but I'll put it in here anyway.

An Aug. 15th Bloomberg story, by Vincent Cignarella (portrayed above), starts with this: The central banks of Australia and New Zealand each recently lowered their benchmark interest rate. According to conventional wisdom, this should have weakened their respective currencies, giving their business a stimulative shot in the arm when functioning as exporters.

But that didn't happen. Rather, the lowered interest rates resulted in ... stronger currencies. What's going on?

If you don't understand why that result is counter-intuitive, you might want to take a step back, Consider a common FX trader's trick known as the "carry trade." The idea is: borrow money in the currency of a country where interest rates are low, then trade it for the currency of another country where interest rates are high, and lend the money out there. You're buying credit low and selling it high. Good on you -- free risk-free money!

Well, it isn't exactly risk free.Nothing is. Central bankers  have a way of changing their minds, and traders attempting the carry trade can end up getting locked into a situation of borrowing high and lending low. Oops.

Anyhoo ... when the central bankers of Australia lowered their interest rates they "should" have made the exchange of their currency, for another more high-interest currency, part of the playbook of carry trade strategists. This should in turn have played a role in the process of weakening the currency, for supply and demand reasons.

But instead what happened, Bloomberg tells us, was the development of a "reverse carry trade," where traders wanted in on the aussie after the interest rates were lowered, strengthening the currency.

I'll stop here and finish up tomorrow.


  1. eToro is the ultimate forex trading platform for newbie and established traders.

  2. I made $20 for each 20 minute survey!

    Guess what? This is exactly what big companies are paying for. They need to know what their average customer needs and wants. So large companies pay millions of dollars every month to the average person. In return, the average person, like me and you, fills out surveys and gives them their opinion.

  3. According to information provided by the National Association of Unclaimed Property Administrators (NAUPA), 1 out of 8 people living in the U.S. are eligible to collect unclaimed assets... With claims averaging claims of $1,000!

    Find Available Federal & State Funds!


Post a Comment

Popular posts from this blog

Great Chain of Being

One of the points that Lovejoy makes in the book of that title I mentioned last week is the importance, in the Neo-Platonist conceptions and in the later development of the "chain of being" metaphor, of what he calls the principle of plenitude. This is the underlying notion that everything that can exist must exist, that creation would not be possible at all were it to leave gaps.

The value of this idea for a certain type of theodicy is clear enough.

This caused theological difficulties when these ideas were absorbed into Christianity.  I'll quote a bit of what Lovejoy has to say about those difficulties:

"For that conception, when taken over into Christianity, had to be accommodated to very different principles, drawn from other sources, which forbade its literal interpretation; to carry it through to what seemed to be its necessary implications was to be sure of falling into one theological pitfall or another."

The big pitfalls were: determinism on the on…

A Story About Coleridge

This is a quote from a memoir by Dorothy Wordsworth, reflecting on a trip she took with two famous poets, her brother, William Wordsworth, and their similarly gifted companion, Samuel Taylor Coleridge.

We sat upon a bench, placed for the sake of one of these views, whence we looked down upon the waterfall, and over the open country ... A lady and gentleman, more expeditious tourists than ourselves, came to the spot; they left us at the seat, and we found them again at another station above the Falls. Coleridge, who is always good-natured enough to enter into conversation with anybody whom he meets in his way, began to talk with the gentleman, who observed that it was a majestic waterfall. Coleridge was delighted with the accuracy of the epithet, particularly as he had been settling in his own mind the precise meaning of the words grand, majestic, sublime, etc., and had discussed the subject with William at some length the day before. “Yes, sir,” says Coleridge, “it is a majestic wate…