Magazine article Global Finance

FX Update

Magazine article Global Finance

FX Update

Article excerpt

End of the carry trade?

There is strong evidence to suggest that we should stop thinking about the rally in JPY crosses seen between 2001 and last year as having been driven by "risk seeking" "carry trade" activity and, instead, look at it as a flight to safe haven currencies in the face of rising concerns about the threat of inflation. However, with commodity prices struggling to rebound (despite simmering tensions between NATO and Russia as well as a more than usually active hurricane season) and concerns about the global economic outlook once again on the rise, there are growing reasons for believing that this multi-year trend is now close to collapse.

It must be noted that at least one popular trend (NZD/JPY) has already drawn to a close. Having more than doubled in value between late 2000 and the summer of last year, the NZD suffered a dramatic turn around as the credit crisis began to hit almost exactly 12 months ago. Since then it has notably failed to gain any upward traction. Finally, with the one year yield gap narrowing and commodity prices falling, the NZD breached its uptrend in the early part of this month. Although it managed to make a brief rebound, downward pressures are now beginning to build once again.

Although NZD/JPY is the most obvious casualty over the past year of the decline in interest in the carry trade, other currency pairs are sending equally ominous signals. Certainly AUD/JPY (which actually managed to sustain a very healthy rally between March and July of this year) is now looking increasingly exposed. Having failed to break through the old highs from 2007 during the early part of this summer, it has fallen by over 10% as commodity prices have come under pressure and the one-year yield gap has shrunk smartly. …

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