RGE - Carry, carry, carry …
リンク: RGE - Carry, carry, carry ….
Brad Setser | Feb 12, 2007
The debate over the size of the yen financed carry trade is far from settled. Former (“The Yen carry trade is on in such huge size”) and current traders (“real money investors ain't short yen and that even the gross -- as opposed to net -- spec yen longs on the IMM are above their 1,3, and 5 year averages”) do not necessarily agree.
The biggest carry trade, no doubt, is the carry trade within the G-10. Think borrowing yen to buy US dollars, Australian dollars, pounds and even euros. G-10 currencies generally float, which means that price moves are often the best guide to flows.
But there is also a carry trade that involves emerging economies. That trade can be funded in dollars, euros or yen. That trade also leaves traces – often in the form of rising central bank reserves. More money coming in often means faster reserve growth
And all available data suggests that the scale of the carry trade picked up recently.
Look at Brazil. Its reserves rose $2b (from $91.88b to $93.82b) last week, after rising by nearly $2b the preceding week ($90.03b to $91.88b).
Look at Turkey. We don’t have data for last week (yet), but the week before, Turkey’s reserves rose by (gulp) $2.7b – going from $61.4 to $64.1b …
Look at India. The reserve bank of India supposedly bought $1.5b in the market last week. That comes after buying about $1b in the last week of January, and about $3b during the month.
Looking at the growth of these high-carry countries reserves doesn’t tell you whether folks were borrowing yen, euros or dollars to buy real, lira and rupees – only that a lot of money was making its way to Brazil, Turkey and India. But I would be very surprised if a lot of these positions were not “funded” with borrowed yen. That is just a hunch – but one that a couple of friends who are in better position to know than I suggest isn’t entirely unfounded.
The growing size of emerging market carry trades may or may not be a proxy for the intra G-10 carry trade. Personally, I suspect it is -- but that is a guess. However, given the recent data on central bank interevention, I don't think that there is much dobut that a lot of levered money flowed into high carry emerging economies over the past two weeks.
One question. How long can these countries keep intervening at this pace? They are all high carry countries, so this kind of intervention costs the central bank money …
Comments
I recall as a know-it-all, overconfident child going into the woods with friends everyday one summer to build a tree-house in the branches of a fine old and noble maple, at an uncomfortable distance to the ground. And just as G10 authorities have now gone on record, I can recall my father, with his greater wisdom and foresight (though no material non-public information), warning his petulant child [me!!] that the endeavor was risky and great care should be taken, lest one falls out of said tree, and breaks one's arm.
Needless to say, but a week later, so it came to pass - fractured in two places, with a most lovely white plaster from thumb-to-shoulder, and an archetypical sling that makes me laugh even now. But the funniest part of it all was that, having fallen, and having said arm feel distinctly unwell, one of the older lads - an arrogant Boy Scout (whose name hilariously enough, I kid you not, was "Hank")) - looked at it and said "Naah, don't worry, it's not broken..!"
As in 1998, it was a capital dislocation event unrelated to the "fundamentals" of the USD/JPY that caused specs to de-lever that caused the carry trade to unwind in a rather instantaneous cascade, a scenario that might reasonably be repeated this time around.
http://nihoncassandra.blogspot.com
Needless to say, but a week later, so it came to pass - fractured in two places, with a most lovely white plaster from thumb-to-shoulder, and an archetypical sling that makes me laugh even now. But the funniest part of it all was that, having fallen, and having said arm feel distinctly unwell, one of the older lads - an arrogant Boy Scout (whose name hilariously enough, I kid you not, was "Hank")) - looked at it and said "Naah, don't worry, it's not broken..!"
As in 1998, it was a capital dislocation event unrelated to the "fundamentals" of the USD/JPY that caused specs to de-lever that caused the carry trade to unwind in a rather instantaneous cascade, a scenario that might reasonably be repeated this time around.
http://nihoncassandra.blogspot.com
Written by Cassandra on 2007-02-12 19:01:12
Brad--The carry trade may have become excessive, so that it can unwind rapidly at any time. On the other hand, we really don't know anything about its magnitude. this makes us uneasy.
The 1998 episode is certainly interesting, but may not be so relevant; currently, there appears to be no country like Russia of 1998, whose default really triggered the unwinding of the carry trade. And then, there was LTCM, which had speculated heavily on the margin between US Treasury bond and junk bond, which widened suddenly and made LTCM bankrupt. Consequently, the dollar further depreciated aginst the yen.
This kind of chain reaction could be possible this time as well, but may appear not likely soon. However, if I am involved in a heavy carry trade, I would surely curtail the position, and invest in safer assets until the carry trade in general has become less prominent. Also, if I am a couterparty of the carry trade, I would substantially reduce my exposure to it. This is simple prudence, when any speculation has become so prevalent and popular, which shows the end may be near.
Fund managers would not agree, because their compensation is linked to the amount of managed assets and the excess returns, and in no way bear loss, which accrues to investers. Beware fund managers!
The 1998 episode is certainly interesting, but may not be so relevant; currently, there appears to be no country like Russia of 1998, whose default really triggered the unwinding of the carry trade. And then, there was LTCM, which had speculated heavily on the margin between US Treasury bond and junk bond, which widened suddenly and made LTCM bankrupt. Consequently, the dollar further depreciated aginst the yen.
This kind of chain reaction could be possible this time as well, but may appear not likely soon. However, if I am involved in a heavy carry trade, I would surely curtail the position, and invest in safer assets until the carry trade in general has become less prominent. Also, if I am a couterparty of the carry trade, I would substantially reduce my exposure to it. This is simple prudence, when any speculation has become so prevalent and popular, which shows the end may be near.
Fund managers would not agree, because their compensation is linked to the amount of managed assets and the excess returns, and in no way bear loss, which accrues to investers. Beware fund managers!
Written by HK on 2007-02-12 20:38:25
given the shape of the yield curve and compressed credit spreads (setting aside some small parts of the mortgage market that are exploding), it seems rather hard to make the big bucks hedge funds promise to their investors without either taking ever bigger levered bets on credit (including using more embedded leverage) or taking on more currency risk (i.e. the carry trade) ... at least that is how it seems to me.
Written by bsetser on 2007-02-12 22:26:20
"Gold was little changed in Asia as it struggled to make headway against the dollar's strength, which eroded the appeal of the precious metal as an alternative asset..." http://www.bloomberg.com/apps/news?pid=20601082&sid=anecSg9RYCEE&refer=canada
Written by Guest on 2007-02-13 07:29:42
From Bloomberg, US Dollar hegemony in global trade breeds complacency in Washington.
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_pesek&sid=aYZHFIjhF5uw
" By buying so many U.S. Treasuries, Asian central banks make it possible for the U.S. to finance massive current-account and budget deficits without devaluing the dollar and raising interest rates. That, in turn, allows the Bush administration to maintain its tax cuts even as it finances wars in Iraq, Afghanistan and who knows where after that. Iran? North Korea?
The stable dollar -- thanks largely to steady Asian demand for it -- leaves rates low enough to encourage U.S. consumers to spend without saving. It also keeps the price of crude-oil imports at a level that discourages Americans from conserving on energy use.
And then the U.S. points the finger at China to boost its currency -- which would benefit the U.S. -- and treads carefully on Europe's campaign for a stronger yen, which could hurt U.S. interests. The dollar is now a political tool as much as it is a medium of exchange.
How are we not to conclude that the strong-dollar policy is a call for the status quo in markets? The current arrangement, which many economists call ``Bretton Woods II,'' is just fine by the U.S. government. Cheap Asian currencies are the cornerstone of this mutually beneficial agreement between the U.S. and Asia.
The U.S. is as addicted to foreign oil as it is to a strong dollar. Just as valuable commodities such as oil distort economies and confuse priorities, the dollar is giving the U.S. few incentives to correct its imbalances and plan for the future. "