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We know Australian dollar is losing its ground recently. It is, in fact, the worst-performed currency in Asia Pacific for year 2008. (It reminds me, it used to be the top performer not long ago 😆 )
I had a look at monthly chart to have a view and feel how bad is the situation right now. Basically, market is wiping out all the gains since Howard government, and the years-long economy honey moon since, approximately, year 2001.
If the currency reflects the economy condition of a country, here is a “chart view” of Aussie economy.
The poor (unlucky ?) Labor party, Mr. Kevin Rudd takes over Australia at the “right time”. Soon after Labour party in charge, we have economy slow down, then collapse of Australia dollar to 5-year low. In short, he takes over Australia at the TOP, well, short term TOP and historical resistance zone. (John Howard took over at the bottom, and support zone though). This cycle should be very close to commodity cycle.
So now, the interesting part is, are we heading back to the previous bottom? or are we able to bounce from this “retracement”? I feel, this will also indicate the duration of Labor party staying in power…
Just my random rant.
Hi Trader Gav. That’s one hell of a chart. It’s ‘game over’ for all those people who have enjoyed extracting profits from the carry baskets over the years. With global deleveraging taking place it makes sense for the carry trade to unwind, but at this pace? It’s unprecedented. I bet anyone who thought they’d exit on the bounces got cleaned out – this time, there was no bounce. I’d like to think that a handful of macro traders finally got their payday after years of calling the end to the carry trade, but most of these guys probably suffered a death by a thousand cuts and got carried out long before this move. Still, at least in FX, it a just a transfer of wealth and not absolute wealth destruction as we are seeing in the stockmarket.
Hi Trader Gav. That’s one hell of a chart. It’s ‘game over’ for all those people who have enjoyed extracting profits from the carry baskets over the years. With global deleveraging taking place it makes sense for the carry trade to unwind, but at this pace? It’s unprecedented. I bet anyone who thought they’d exit on the bounces got cleaned out – this time, there was no bounce. I’d like to think that a handful of macro traders finally got their payday after years of calling the end to the carry trade, but most of these guys probably suffered a death by a thousand cuts and got carried out long before this move. Still, at least in FX, it a just a transfer of wealth and not absolute wealth destruction as we are seeing in the stockmarket.
The unwinding of the carry trade on this scale is a vindication for the school of thought that support the ‘no such thing as a free lunch’ theory. Uncovered interest rate parity (UIP) has suddenly reasserted itself in no small measure.
But, should we call it (carry trade) a failure now? Maybe not. It just get ugly, really ugly at the moment. It is still too early to conclude.
The unwinding of the carry trade on this scale is a vindication for the school of thought that support the ‘no such thing as a free lunch’ theory. Uncovered interest rate parity (UIP) has suddenly reasserted itself in no small measure.
But, should we call it (carry trade) a failure now? Maybe not. It just get ugly, really ugly at the moment. It is still too early to conclude.
Definitely agree. If anything, every one is cleaned out and the process could start over again. I reckon interest rates as drivers of currency appreciation will reassert once things settle out of chaos mode, and carry traders will jump back in to the trade. From this point, I can see low leverage carry trade positions holding quite well as long term investments.
Definitely agree. If anything, every one is cleaned out and the process could start over again. I reckon interest rates as drivers of currency appreciation will reassert once things settle out of chaos mode, and carry traders will jump back in to the trade. From this point, I can see low leverage carry trade positions holding quite well as long term investments.
Scary chart. But my guess (I’m nearly certain, actually) is the carry will return, under these conditions:
(1) Diverging interest rate differentials,
(2) Increasing appetite for risk, and
(3) Low volatility.
And a few other things besides, like “orderly” markets (whatever those are) and discernible trends that either add direct value or allow accruing interest to add value to the position without incurring significant drawdowns.
At some point, perhaps in the near future, I’m confident the carry will again emerge as a viable trade.
The comment making the distinction between wealth transfer vs. wealth destruction makes me hope C will continue to blog on currencies at RizDin…if not at the3500.
Anyway, my two pips.
Scary chart. But my guess (I’m nearly certain, actually) is the carry will return, under these conditions:
(1) Diverging interest rate differentials,
(2) Increasing appetite for risk, and
(3) Low volatility.
And a few other things besides, like “orderly” markets (whatever those are) and discernible trends that either add direct value or allow accruing interest to add value to the position without incurring significant drawdowns.
At some point, perhaps in the near future, I’m confident the carry will again emerge as a viable trade.
The comment making the distinction between wealth transfer vs. wealth destruction makes me hope C will continue to blog on currencies at RizDin…if not at the3500.
Anyway, my two pips.
I agree,carry trade will be back. But the question is, how long does it take for this chaos to settle. In fact, I reckon carry trade is an indicator of the stability of currencies market.
Rizdin, the real man fraternity, I have been reading it recently, frequently!
I agree,carry trade will be back. But the question is, how long does it take for this chaos to settle. In fact, I reckon carry trade is an indicator of the stability of currencies market.
Rizdin, the real man fraternity, I have been reading it recently, frequently!
Thanks for popping by my non-trading blog folks. My trading days are no more, but I may write a little something on currencies every now and then. I’ll always have one eye on the markets though, and will continue to read your blogs with interest. Keep carrying that torch, independent traders!
Thanks for popping by my non-trading blog folks. My trading days are no more, but I may write a little something on currencies every now and then. I’ll always have one eye on the markets though, and will continue to read your blogs with interest. Keep carrying that torch, independent traders!