Will The Carry Trade Come Back In Vogue?
FX Markets Ignore Reality
As traders, we can never get too married to a
belief or opinion; the market is always right, even if it seems it is wrong.Â
Case in point, the dollar has put in a nice performance this week, and is now
just a few ticks above the 50 day EMA at 88.53. It would appear that hawkish
comments from Greenspan have raised the prospect of a tighter rate schedule
going forward. However, is this really possible? Were the carry trades that
were liquidated this week (GBP, AUD & NZD) a sign of things to come, or after
the dust settles will it be a great opportunity to pick these pairs up on the
cheap?
Some analysts agree. Boris Schlossburg,
Fundamental Analyst at Refco had this to say in his morning comments:
“Is the market correct in
abandoning the carry trade? Only if the dollar bulls are right in their
assumption that real US GDP will grow 4.5% this year and 3.7% next. As we have
pointed out ad nausea this week, most recent eco data offers little evidence to
support that view. Yesterday, after the close of US equity markets both
Microsoft and Amazon reported in-line revenue but noted that forward sales
growth would slow. More tellingly, current revenue growth was highly depended on
favorable currency exchange rates. In Microsoft’s case fully 12% or $1.1Bn of
$9.3Bn was the result of positive FX conversion. While MSFT and AMZN are hardly
proxies for the whole US economy, their guarded guidance speaks volumes about
the quality of future demand.
Against the USD – which presently
yields 1.25% – the three best cross candidates for the carry trade are; the Kiwi
with its 5.75% yield, the Aussie with 5.5% yield and the Pound with 4.5% yield.
Although it has the lowest rate differential, cable may offer traders the most
interesting opportunity. UK is experiencing the longest period of uninterrupted
growth in 200 years. It enjoys some of the best fundamentals in the G-7 block
including 2.7% unemployment 3.7% GDP and relatively tame 1.6% CPI. Tonight’s UK
GDP which, as expected, printed 0.9% reaffirms analyst’s expectation that BOE
will raise rates at the August MPC. meeting. Should the GBP/USD rate
differential continue to widen and should UK maintain its pace of growth the GBP/USD
cross may bring the carry trade back in vogue. In short, absent some near term
proof of strong US economic growth, reports of the death of the carry trade may
be greatly exaggerated.”
Technically, the picture is still a bit bleak
regarding GBP, AUD & NZD on both my daily and short-term models. Nonetheless, I
continue to see positive divergences on the way down as well as some minor
support levels continuing to hold. Meanwhile, on a short-term model the dollar
continues to make negative divergences the whole way up. It is impossible to
call the turning point at this stage, for now we can only make observations and
lean on the macro view as a way to position on what seems like an inevitable
move back down in the dollar.
Today’s Levels:
EUR:Â Â Â
1.2188, 1.2256
GBP:Â Â Â
1.8350, 1.8420
JPY:Â Â Â 110,
110.40, 109.67
As always, feel free to send me your comments and
questions.
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