Skip to main content

Reverse Carry Trade, Part II

Image result for Aussie dollar


As we discussed yesterday, if a nation's central bank lowers its interest rates, the usual expectation is that it will weaken its currency. Part of the reason why: it will set up a carry trade, in which profiteers will borrow money at its low rates, then exchange that currency for another currency, that issued by a higher-interest rate country, so these profiteers (I use the term without animus -- it simply means "those seeking a profit") can lend out for a higher rate than the one at which they are borrowing, pocketing the difference. This activity, given supply/demand principles predictably weakens the currency the profiteers are leaving and strengthens that into which they're moving.

This brings us back to the mystery with which we began. Australia and New Zealand have both recently lowered interest rates. In each case, though, that has corresponded to a strengthening of the currency. Back in late May, you would have needed 1.39 Aussie dollars to buy a US dollar. By August 10 that was down to around 1.30.

What is going on? Perhaps part of the answer is a "reverse carry trade." Could profiteers actually have decided to work it the other way around? To exchange the higher interest rate currencies for the lower? And if so ... why?

Cignarella suggests that there is a reverse carry at work. The reason? Capital appreciation. One wouldn't borrow at a high rate to lend at a lower one, but one might borrow at a high rate to buy assets within a country, or a currency zone, with a lower rate.  Thus, one would accept interest rate losses and in return reap more-than-compensatory capital gains on those assets.

Is this happening? I don't know. Cignarella doesn't actually make a very emphatic case for it. He simply suggests that those who are "puzzled" by the counter-intuitive moves in Forex markets "should consider" the potential for a reverse carry.

Okay, consider it considered. I'll keep an eye out for further discussions of and perhaps evidence that this is underway.

Comments

  1. Great Blog!! That was amazing. Your thought processing is wonderful. The way you tell the thing is awesome.

    Foreign Currency Exchange

    ReplyDelete
  2. ForexTrendy is an innovative software capable of recognizing the safest continuation chart patterns. It scans through all the charts, on all time frames and analyzes every possible breakout.

    ReplyDelete
  3. eToro is the ultimate forex broker for rookie and professional traders.

    ReplyDelete

Post a Comment

Popular posts from this blog

England as a Raft?

In a lecture delivered in 1880, William James asked rhetorically, "Would England ... be the drifting raft she is now in European affairs if a Frederic the Great had inherited her throne instead of a Victoria, and if Messrs Bentham, Mill, Cobden, and Bright had all been born in Prussia?"

Beneath that, in a collection of such lectures later published under James' direction, was placed the footnote, "The reader will remember when this was written."

The suggestion of the bit about Bentham, Mill, etc. is that the utilitarians as a school helped render England ineffective as a European power, a drifting raft.

The footnote was added in 1897. So either James is suggesting that the baleful influence of Bentham, Mill etc wore off in the meantime or that he had over-estimated it.

Let's unpack this a bit.  What was happening in the period before 1880 that made England seem a drifting raft in European affairs, to a friendly though foreign observer (to the older brother…

Cancer Breakthrough

Hopeful news in recent days about an old and dear desideratum: a cure for cancer. Or at least for a cancer, and a nasty one at that.

The news comes about because investors in GlaxoSmithKline are greedy for profits, and has already inspired a bit of deregulation to boot. 

The FDA has paved the road for a speedy review of a new BCMA drug for multiple myeloma, essentially cancer of the bone marrow. This means that the US govt has removed some of the hurdles that would otherwise (by decision of the same govt) face a company trying to proceed with these trials expeditiously. 

This has been done because the Phase I clinical trial results have been very promising. The report I've seen indicates that details of these results will be shared with the world on Dec. 11 at the annual meeting of the American Society of Hematology. 

The European Medicines Agency has also given priority treatment to the drug in question. 

GSK's website identifies the drug at issue as "GSK2857916," althou…

Francesco Orsi

I thought briefly that I had found a contemporary philosopher whose views on ethics and meta-ethics checked all four key boxes. An ally all down the line.

The four, as regular readers of this blog may remember, are: cognitivism, intuitionism, consequentialism, pluralism. These represent the views that, respectively: some ethical judgments constitute knowledge; one important source for this knowledge consists of quasi-sensory non-inferential primary recognitions ("intuitions"); the right is logically dependent upon the good; and there exists an irreducible plurality of good.

Francesco Orsi seemed to believe all of these propositions. Here's his website and a link to one relevant paper:

https://sites.google.com/site/francescoorsi1/

https://jhaponline.org/jhap/article/view/3

What was better: Orsi is a young man. Born in 1980. A damned child! Has no memories of the age of disco!

So I emailed him asking if I was right that he believed all of those things. His answer: three out of …