<TABLE cellSpacing=0 cellPadding=0 width=452 border=0><TBODY><TR><TD vAlign=top width=452 colSpan=2>Published April 15, 2009
</TD></TR><TR><TD vAlign=top width=452 colSpan=2>Carry trade makes biggest gains since '99
Business picks up as forex volatility eases and govt stimulus plans boost confidence
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(NEW YORK) The carry trade is making a comeback after its longest losing streak in three decades.
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</TD></TR><TR class=caption><TD>Attractive: A basket of currencies consisting of the Aussie dollar (above), Brazilian real, Turkish lira, Hungarian forint, Indonesian rupiah, South African rand and NZ dollar - bought with yen, US dollars and euros - earned an annualised 196% from March 2 to April 10 </TD></TR></TBODY></TABLE>Stimulus plans and near-zero interest rates in the developed economies are boosting investor confidence in emerging markets and commodity-rich nations with interest rates as much as 12.9 percentage points higher.
Using US dollars, euros and yen to buy the currencies of Brazil, Hungary, Indonesia, South Africa, New Zealand and Australia earned 8 per cent from March 20 to April 10, that trade's biggest three-week gain since at least 1999, Bloomberg data show.
Goldman Sachs, Insight Investment Management and Fischer Francis Trees & Watts have begun recommending carry trades, which lost favour last year as the worst financial crisis since the Great Depression drove investors to the relative safety of Treasuries. Now, efforts to end the first global recession since World War II are sending money into stocks, emerging markets and commodities.
'The global economy seems to have reached an inflection point,' said Dale Thomas, head of currencies at Insight Investment Management in London, which oversees US$121 billion. 'We're set for a period of some classic risk currency trades, where you sell the dollar against emerging-market currencies.'
Carry trades use funds in countries with lower borrowing costs to invest in those with higher rates, allowing investors to pocket the difference.
Speculators fled the strategy last year as central banks cut rates to revive growth, narrowing spreads, and as currency swings increased risks.
Foreign-exchange volatility expectations surged 73 per cent in three days to a record on Oct 24, a JPMorgan Chase & Co index shows.
Mr Thomas recommends the Australian dollar and the real in Brazil, where the benchmark central bank rate is 11.25 per cent, or about 11 points more than the corresponding US rate.
Borrowing US dollars at the three-month London Interbank Offered Rate of 1.13 per cent and using the proceeds to buy real and earn Brazil's three- month deposit rate of 10.51 per cent would net an annualised 9.38 per cent, as long as both currencies remain stable.
Carry trades were profitable for most of the past three decades. They produced average annual returns of 21 per cent in the 1980s with no down years, the best of four commonly used currency strategies, according to ABN Amro indices.
In the 1990s, carry-trade investors suffered three down years, including a 54 per cent slide in 1992, ABN Amro data compiled by Bloomberg show. From 2000 to 2005, the trade was again on top with average gains of 16 per cent.
Then ,it dropped three years in a row in 2006-08, the longest streak since 1976-78, for an annualised average loss of 16.5 per cent through Feb 28.
Most of the decline came after June 2008 as the collapse of US sub-prime mortgages froze credit markets and led to the bankruptcy of Lehman Brothers Holdings, the biggest corporate failure in history.
As investors fled to the safest assets, the greenback climbed 26 per cent between July 15 and March 4, when it reached its highest in almost three years, according to the Intercontinental Exchange's Dollar Index, against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona.
Prices for Treasuries rose, sending the 10-year note yield to a record low of 2.0352 per cent on Dec 18, from 4.07 per cent on Oct 14.
Last month, the carry trade roared back, with ABN Amro's index gaining 4.6 per cent, its best month since September 2003.
As of yesterday, the Dollar Index had fallen about 5.4 per cent from its March 4 high.
An equally weighted basket of currencies consisting of the Turkish lira, Brazilian real, Hungarian forint, Indonesian rupiah, South African rand and Australian and New Zealand dollars - bought with yen, US dollars and euros - earned an annualised 196 per cent from March 2 to April 10. That trade produced a 41 per cent annualised loss from September, when Lehman collapsed, through February.
Benchmark rates in those seven economies range from 3 per cent in New Zealand and Australia to Brazil's 11.25 per cent. Comparable rates in the euro region, Japan and the US are 1.25, 0.1 and between zero and 0.25 per cent, respectively.
Smaller swings in foreign exchange are making the carry trade less vulnerable to a sudden wipeout. Currency volatility expectations fell to a six-month low on Monday from Oct 24's record, the JPMorgan index shows.
'There are increasing signs that FX volatility has peaked,' Goldman Sachs said in a report last week titled Time to Reconsider Carry. 'The conditions are about to fall in place to make carry strategies attractive again.'
The risk is that global economies will continue to shrink, leading investors back to the most-traded currencies - US dollar, yen and euro - and forcing emerging economies to reduce benchmark rates to encourage growth, narrowing interest spreads.
David Rolley, co-head of global fixed income in Boston for Loomis Sayles & Co, isn't convinced the carry trade's recent gains will last.
The US recession, now in its 17th month, has cost 5.1 million Americans their jobs, the worst drop in the post-war era. Median estimates in a Bloomberg News economist survey predict unemployment will average 8.9 per cent this year and more than 9 per cent in 2010.
'That does not look like we've had any momentum change,' said Mr Rolley, whose firm manages US$106 billion. 'People are not prepared to call an end to the global downturn as of yet. I think carry trade is going to come back, but it's going to be very muted.' - Bloomberg
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</TD></TR><TR><TD vAlign=top width=452 colSpan=2>Carry trade makes biggest gains since '99
Business picks up as forex volatility eases and govt stimulus plans boost confidence
<TABLE class=storyLinks cellSpacing=4 cellPadding=1 width=136 align=right border=0><TBODY><TR class=font10><TD align=right width=20>
</TD><TD>Email this article</TD></TR><TR class=font10><TD align=right width=20>
</TD><TD>Print article </TD></TR><TR class=font10><TD align=right width=20>
</TD><TD>Feedback</TD></TR></TBODY></TABLE>(NEW YORK) The carry trade is making a comeback after its longest losing streak in three decades.
<TABLE class=picBoxL cellSpacing=2 width=100 align=left><TBODY><TR><TD>
</TD></TR><TR class=caption><TD>Attractive: A basket of currencies consisting of the Aussie dollar (above), Brazilian real, Turkish lira, Hungarian forint, Indonesian rupiah, South African rand and NZ dollar - bought with yen, US dollars and euros - earned an annualised 196% from March 2 to April 10 </TD></TR></TBODY></TABLE>Stimulus plans and near-zero interest rates in the developed economies are boosting investor confidence in emerging markets and commodity-rich nations with interest rates as much as 12.9 percentage points higher. Using US dollars, euros and yen to buy the currencies of Brazil, Hungary, Indonesia, South Africa, New Zealand and Australia earned 8 per cent from March 20 to April 10, that trade's biggest three-week gain since at least 1999, Bloomberg data show.
Goldman Sachs, Insight Investment Management and Fischer Francis Trees & Watts have begun recommending carry trades, which lost favour last year as the worst financial crisis since the Great Depression drove investors to the relative safety of Treasuries. Now, efforts to end the first global recession since World War II are sending money into stocks, emerging markets and commodities.
'The global economy seems to have reached an inflection point,' said Dale Thomas, head of currencies at Insight Investment Management in London, which oversees US$121 billion. 'We're set for a period of some classic risk currency trades, where you sell the dollar against emerging-market currencies.'
Carry trades use funds in countries with lower borrowing costs to invest in those with higher rates, allowing investors to pocket the difference.
Speculators fled the strategy last year as central banks cut rates to revive growth, narrowing spreads, and as currency swings increased risks.
Foreign-exchange volatility expectations surged 73 per cent in three days to a record on Oct 24, a JPMorgan Chase & Co index shows.
Mr Thomas recommends the Australian dollar and the real in Brazil, where the benchmark central bank rate is 11.25 per cent, or about 11 points more than the corresponding US rate.
Borrowing US dollars at the three-month London Interbank Offered Rate of 1.13 per cent and using the proceeds to buy real and earn Brazil's three- month deposit rate of 10.51 per cent would net an annualised 9.38 per cent, as long as both currencies remain stable.
Carry trades were profitable for most of the past three decades. They produced average annual returns of 21 per cent in the 1980s with no down years, the best of four commonly used currency strategies, according to ABN Amro indices.
In the 1990s, carry-trade investors suffered three down years, including a 54 per cent slide in 1992, ABN Amro data compiled by Bloomberg show. From 2000 to 2005, the trade was again on top with average gains of 16 per cent.
Then ,it dropped three years in a row in 2006-08, the longest streak since 1976-78, for an annualised average loss of 16.5 per cent through Feb 28.
Most of the decline came after June 2008 as the collapse of US sub-prime mortgages froze credit markets and led to the bankruptcy of Lehman Brothers Holdings, the biggest corporate failure in history.
As investors fled to the safest assets, the greenback climbed 26 per cent between July 15 and March 4, when it reached its highest in almost three years, according to the Intercontinental Exchange's Dollar Index, against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona.
Prices for Treasuries rose, sending the 10-year note yield to a record low of 2.0352 per cent on Dec 18, from 4.07 per cent on Oct 14.
Last month, the carry trade roared back, with ABN Amro's index gaining 4.6 per cent, its best month since September 2003.
As of yesterday, the Dollar Index had fallen about 5.4 per cent from its March 4 high.
An equally weighted basket of currencies consisting of the Turkish lira, Brazilian real, Hungarian forint, Indonesian rupiah, South African rand and Australian and New Zealand dollars - bought with yen, US dollars and euros - earned an annualised 196 per cent from March 2 to April 10. That trade produced a 41 per cent annualised loss from September, when Lehman collapsed, through February.
Benchmark rates in those seven economies range from 3 per cent in New Zealand and Australia to Brazil's 11.25 per cent. Comparable rates in the euro region, Japan and the US are 1.25, 0.1 and between zero and 0.25 per cent, respectively.
Smaller swings in foreign exchange are making the carry trade less vulnerable to a sudden wipeout. Currency volatility expectations fell to a six-month low on Monday from Oct 24's record, the JPMorgan index shows.
'There are increasing signs that FX volatility has peaked,' Goldman Sachs said in a report last week titled Time to Reconsider Carry. 'The conditions are about to fall in place to make carry strategies attractive again.'
The risk is that global economies will continue to shrink, leading investors back to the most-traded currencies - US dollar, yen and euro - and forcing emerging economies to reduce benchmark rates to encourage growth, narrowing interest spreads.
David Rolley, co-head of global fixed income in Boston for Loomis Sayles & Co, isn't convinced the carry trade's recent gains will last.
The US recession, now in its 17th month, has cost 5.1 million Americans their jobs, the worst drop in the post-war era. Median estimates in a Bloomberg News economist survey predict unemployment will average 8.9 per cent this year and more than 9 per cent in 2010.
'That does not look like we've had any momentum change,' said Mr Rolley, whose firm manages US$106 billion. 'People are not prepared to call an end to the global downturn as of yet. I think carry trade is going to come back, but it's going to be very muted.' - Bloomberg
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