Home > Uncategorized > Brief Update 2009/12/18: Is Carry Trade Crisis Brewing on Back of Weak European News?

Brief Update 2009/12/18: Is Carry Trade Crisis Brewing on Back of Weak European News?

▪  While somewhat better than expected German IFO (DEC) surveys have limited the equity market slippage after yesterday’s selloff, the US Dollar Index remains commensurately stronger than any of weakness in stock markets. Whatever one may think about the potential for a true Carry Trade Crisis, there has undoubtedly been no small amount of borrowing cheap in the beleaguered buck that has driven the central banks rightful program of risk asset reflation.

▪  With due respect for the long-time “received wisdom”, outdated expectations that interest rate differentials drive currency trends is almost never the case. Think about it: who’s actually going to borrow in Europe at 1.00% and bring the money to the US at 0.50% even if the Fed does bump the rates. Sustained foreign exchange trends (as opposed to sort term blips) are always driven more so by investment and (more recently) trading flows. 

▪  In any event, it is now important to keep an eye on the sequence of the US dollar and equity market swings.  If the US dollar leads further weakening of equities, that will be an important  sign it is the driver; as has been the case on its recent strength that has occurred prior to any real commensurate equities failure below recent trading lows.  Will that continue to develop into a ‘carry trade crisis’? It’s going to be interesting… we shall see. The further intermarket implication of that will likely be more of a ‘haven’ bid returning to the govvies as well.

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