RBA Puts a Stop to the Carry Trade

Currency Currents:
RBA PUTS A STOP TO THE CARRY TRADE
Nov 03 2009 09:35 am (EST)

Story By:
Black Swan Capital LLC
Key News

Retail banks pounce after RBA lifts interest rates to 3.5pc (The Australian)
The mother of all carry trades faces an inevitable bust (Financial Times)
Manufacturing output rises across the world (Financial Times)

Quotable
“UBS just posted ugly results that bode ill for European bank results and CIT just filed for bankruptcy. This raises the question: isn't it too early to pay back government money?”
David Thebault, head of quantitative sales trading at Global Equities in Paris

FX Trading – Glenn Stevens says no more carry-trade, for now ...

The profit-taking may have already begun after seeing the US dollar muster up strength here and there over the last couple days. But either way, RBA governor Glenn Stevens and his boys are seeing that the profit taking lasts a little bit longer.

It was just announced that the Reserve Bank of Australia will hike rates for a second consecutive month. But they took away the certainty of a similar decision in December. The problem: the market already baked that December rate hike into the cake ... which explains why the Australian dollar is down nearly 100 PIPs as I throw this together.

So with the RBA seemingly out of the picture till February, the Australian dollar gets to take a rest until the market re-prices expectations. The re-pricing could happen quickly, and support for the Aussie dollar may come right back.

But ... the market may want to take some extra time to evaluate economic developments and the apparent reaction to higher interest rates before hopping back on the gravy train (synonymous with carry trade).

Up until now the Australian dollar had been riding high on carry trade money flow. Nouriel Roubini, in the Financial Times, recently discussed the power behind the current US dollar carry trade. Not only do traders get the obvious yield advantage with the Fed Funds rate at basically zero and the RBA benchmark at 3.5%, but steady US dollar depreciation is an added kicker.

The RBA’s decision not to commit to a hike in December plus the rather sharp bounce by the US dollar lately is leaving traders questioning their carry trade positions. If the RBA does hold off till February that effectively gives the Federal Reserve time to shift their rhetoric towards tighter policy, which could offer up additional US dollar support.

We’ve seen a pretty big move already this morning in the US dollar index. Note on the daily chart above how it’s moved above trendline resistance that tracks the steady declines of the last four months.

You could say Mr. Stevens and Co. have put a short-term stop to the US dollar carry trade. You could say this morning’s worry over European banks and banking shares have helped support the buck too.

Or, if you’re Jack, you would say today’s move has nothing to do with that stuff and everything to do with the full moon last night.

I won’t go into the details of Jack’s lunar market analysis because, frankly, I don’t know the extent his head is stuck in the sky. But the general reason behind the analysis is that people behave strangely during full moons; crazy things can happen.

And I guess there’s not much crazier than a strong dollar.

Jack, you just keep back-tasting those full moon days on your FX charts; I’ll stick to hitting the waves when the tides are just right. [Elliott Waves, of course!]

John Ross Crooks III
Black Swan Capital LLC
www.blackswantrading.com

Trade the corrections ... buy the dips ... position for the long-haul.

We do it all in our Currency Investor newsletter that’s geared toward newcomers and experienced investors who are looking for a conservative approach to the foreign exchange market.

In plain language we deliver global macroeconomic analysis and actionable ideas geared toward exchange rate fluctuations.

Our analysis is comprehensible and our recommendations consist of ETFs, so don’t get turned off by buzz words like “exchange rates” or “foreign exchange” – this investing strategy is as easy to implement as buying and selling stocks.

Plus, at $39 per year it’s a deal you’d be hard-pressed to find anywhere else. Thorough global analysis plus complete investment guidance ... and all for only $39 per year? You can’t beat that with a stick. Click here to read more ...

Top Content »

Contributor Login

Free e-mail Alerts

About Us

Contact

Advertise With Us


Rates	News	Video	Currency Focus	Resources
Forex Spot Rates	Top Forex TV Economic News	Most Recent ForexTV Video	Euro (EUR)	Global Economic Calendar
Cross Rates	Commodity News	Forex News	Japanese Yen (JPY)	Currency Converter
	Equity Market News	Stocks & Bonds	Sterling (GBP)	Glossary
Charts	World Market Previews	Education Video Series	Swiss Franc (CHF)	Currency Codes
Forex Charts	Forex Market Commentary	ProSticks Analysis	Canadian Dollar (CAD)	Global Statistic Resources
ProStick Charts	Technical Analysis		Australian Dollar (AUD)	CPI Avg. Price Calculator
			New Zealand Dollar (NZD)	CPI Inflation Calculator
			Nordic (NOK)	CIA World Factbook
			EMEA	Pivot Point Calculator
				Content Sharing

RISK DISCLAIMER: By using this web site you agree to its terms and conditions. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts. Forex (or FX or off-exchange foreign currency futures and options) trading involves substantial risk of loss and is not suitable for every investor. The value of currencies may fluctuate and investors may lose all or more than their original investments. Risks also include, but are not limited to, the potential for changing political and/or economic conditions that may substantially affect the price and/or liquidity of a currency. The impact of seasonal and geopolitical events is already factored into market prices. The leveraged nature of FX trading means that any market movement will have an equally proportional effect on your deposited funds and such may work against you as well as for you. Past results are no indication of future performance. Information contained this web site is intended for informational purposes only and was obtained from sources believed to be reliable. Information is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted.
	Privacy Policy \| Terms and Conditions

Sponsored by

Forex Brokers

Top Content »