Posts tagged carry trading
A return of the USD carry trade?

A few weeks ago I provided a bird’s eye view of most of the major asset classes, what they did in Q1, and what they’re likely to do for the rest of the year. I neglected the most important one though; the dollar. I am convinced that other markets eventually will take their cue from what happens to the greenback. The bull case is simple. The U.S. economy is about to get a jolt of fiscal stimulus, propelling growth to above 3%. The labour market has plenty of hidden slack, and productivity is rising, which mean that the Fed won’t have to hike the economy into the stone age to quell inflation and wage growth.  Trade wars aren’t a problem, and in the case of U.S. tariffs on imports, the dollar will appreciate offsetting a boost to competitiveness. If the shit hits the fan, the dollar will be the safe haven of choice as capital flees the more open and exposed economies in Europe and China. Mr. Trump might not get a lower trade deficit but he can “win” a trade war with the rest of the world. The contrasting bear case is equally straightforward. The U.S. twin deficit is about to widen significantly, and foreign investors need compensation to finance the party. Higher bond yields and a weaker dollar are a necessary adjustment to reach a new equilibrium.

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FX Markets 2010 – The Old Maid, Global Imbalances and Carry Trade

This piece was written before Christmas and will appear in the first 2010 edition of the Forex Journal. The data covers the market up until mid December.


Old Maid is a card game where the simple task is to avoid holding a given card (often the queen of spades) at the end. Even in the company of good friends however, holding Old Maid at the end is not fun. Often, you have to buy the drinks, drop a piece of clothes, or endure other travails. And as it turns out, the global FX market is not unlike this good old game of cards where the Old Maid is proxied by having a strong currency on whose shoulders the correction of global macroeconomic imbalances must invariably fall. In this way, and although one sometimes get the feeling that everyone believes that everybody may actually export their way out of their current misery, buying one country’s currency means selling another and thus, someone (be it an individual economy or a group/basket of economies) must end up holding Old Maid.

The discussion on global imbalances has many faces, but in the context of currency fluctuations and FX markets the focus tends, one way or the other, to gravitate towards the need for the US dollar to fall. This was evident before the crisis and still is. However, if this seems obvious to the most ardent dollar bears as well as to those who still see a structurally important role for the buck going forward, it has been far less evident who should pick up the slack if the dollar is to correct to the new global fundamentals. In this way, key emerging economies are still pegging their currency to the green back and in general; while most claim to see the benefit of a strong currency they just don’t want it to be their currency.

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