We’ve noted the level of state intervention currently impacting FX markets. But Barcap’s Steven Englander puts it all rather succinctly in his latest note.
For the BarCap man, it is down to a battle between public and private interests (our emphasis):
Our subsample of early reserve reporting central banks shows an increase in reserves of 1.7%, an acceleration over the prior month and the correlation between the last 12 months of hedge fund returns and EUR/USD less than 30% (even on a much shorter-term basis, the correlation is quite low with respect to EUR/USD and commodity currencies). From the eighth business day of September (when the sell USD signal was last received) till yesterday’s close, the USD depreciated 1.23% against the EUR and 4.7% against commodity currencies. Notwithstanding the current levels, the signals that private sector positions remain relatively light and that the burden of USD buying remains on the public sector suggest further USD weakness in the month ahead That burden of public sector USD buying, of course, comes in the face of the US dollar’s new role as the world’s latest carry-trade currency of choice.
For example, note Barcap’s Carry-Trade unwind risk model, which shows just how safe it is at any given time to play the carry trade:
Barcap explains its methodolgy for the model as follows:
The Barcap carry unwind risk model is a statistical model that uses market risk conditions, the market price of risk, co-movement of asset prices, and speculative positioning to predict the likelihood of future unwind of G10 FX carry trades. The unwind risk index is a piecewise linear transformation based on the forecasted unwind probability and the observed frequency of unwind. Since 1999, a weekly rebalanced G10 carry portfolio, which is long the three highest-yielding currencies and short the three lowest-yielding ones, would have earned 4.3% annualized excess return, while long-neutral and long-short strategies would have earned 6.5% and 8.7%, respectively (long if the unwind risk index is below 50 and neutral or short if the index is greater than 50).
Which, judging by the chart above, means it’s pretty darn safe to put on carry-trades at the moment.
Related links:
Intervene or do not intervene, there is no try – FT Alphaville
Sterling declines after inflation hits 5-year low – FT