Tuesday, September 16, 2008

Long Term Carry Trade Prognosis

With the temporary loan facility made available to AIG by the Fed it seems that the currency markets are getting back a bit more appetite for risk.

The Yen has been dropping and carry trade pairs have floated erratically to more respectable levels. The real question is how the US markets will react tomorrow. I'm expecting the equity markets, the DOW, to do well but I don't know if the carry trades will look appetizing.

If you've been following along you'll know that I put a grid of limit buy orders above the falling prices during the recent crisis. Many of these were struck today shortly after the AIG bailout was announced... allowing me to avoid risk on the way down and letting me catch the upturn without having to be married to my trading platform.

Since I'm feeling smart, which means I'm likely to put in my foot in my mouth at any time, I'll talk about my current thoughts. I am expecting that Asia, most notably China, will be resistant to economic downturn. This will allow countries in the region, again most notably Australia and New Zealand, to grow exports whether or not US and European markets have slowed -- especially since China is very hungry for commodities.

The long term effect of this on Forex markets is that the interest rates in those countries would fall much less than expected or be increased much sooner than expected. Japan, on the other hand, is not known for it's ability to provide commodities. It may find itself more tied to the fates of the US and European markets. If so, and if those areas do drag down the Japanese economy, then the carry trades will be hot properties.

This means that it's time to keep an eye out for long term bottoming activities in the JPY crosses. It might take six days, six months or several years, but keep an eye on economic activity in commodity rich countries. This will give you an early clue as to whether or not this is going to occur. Alternately, keep on eye on the US, because if that economy doesn't implode, everyone running for cover is certainly in the wrong.

Anyhow, since I'm the business of speculating, I guess it doesn't hurt to speculate, does it?

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