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

Post a Comment

Popular posts from this blog

Hume's Cutlery

David Hume is renowned for two pieces of cutlery, the guillotine and the fork.

Hume's guillotine is the sharp cut he makes between "is" statements and "ought" statements, to make the point that the former never ground the latter.

His "fork" is the division between what later came to be called "analytic" and "synthetic" statements, with the ominous observation that any books containing statements that cannot be assigned to one or the other prong should be burnt.

Actually, I should acknowledge that there is some dispute as to how well or poorly the dichotomy Hume outlines really maps onto the analytic/synthetic dichotomy. Some writers maintain that Hume meant something quite different and has been hijacked. Personally, I've never seen the alleged difference however hard they've worked to point it out to me.

The guillotine makes for a more dramatic graphic than a mere fork, hence the bit of clip art above.

I'm curious whe…

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…