This installment in our occasional and disjointed series into the risk of balance-sheet driven currency crises in EMs — based on the hidden debt that lurks beneath — features a new if well flagged villain: oil.
The broad question as ever is: have the majority of emerging markets still got manageable foreign currency external debt levels? And do they rule themselves out as candidates for a self-fulfilling currency crisis? Even when dark debt is taken into account?
Tl;dr: Yes, with a few exceptions. Read more
Ignoring the fact that the euro is acting more like a random walk model than usual, one seemingly obvious consequence of Draghi’s swarm attack is the euro’s growing attraction as as funding currency. As Barc said:
The structural selling of EUR vol post-meeting was the standout FX trade. We view this as further evidence that the current carry-supportive environment characterized by accommodative global monetary policy, historically low vol and strong equity market performance is likely to continue. It also supports our view that the EUR should be the funding currency of choice.
And from BoNYM’s Simon Derrick over the weekend: Read more
The rather less dramatic sequel is brought to you by Nomura:
That isn’t one of the pungent lines from a BofAML note on Tuesday — dissecting “an international leverage binge, yet another carry trade, the third in 20 years,” by issuers of corporate bonds in emerging markets.
But there are plenty already:
The Fed giveth and the Fed taketh away
The long-term emerging market equity story is the story of wars
In each cycle, risk morphs – we repeat the mistakes of our grandfathers, not our fathers.
That, and a call for this $2trn carry trade to unwind as the Fed begins rolling liquidity back. Which makes investing in EM not so much about EM — as about what the Fed will be doing as it exits policy.
As they say on Battlestar Galactica, “all this has happened before and all this will happen again”.
And it’s not just Joseph and the pharaoh who offer worthwhile precedents for the “sell-to-store” commodities warehousing carry trade. It turns out similar activities and concerns were very much rife in the grain markets in the 1920s as well.
Here follow some wonderfully evocative of today snippets from the 1921 Federal Trade Commission report on the grain trade: Read more
By Theo Casey, marketcolor
The loss of simple narratives in forex is something we are learning to deal with together. To continue navigating major and minor crosses we need to make complex narratives more digestible.
Consider dollar-yen. It’s behaving like the bought end of a carry trade. Read more
Today carry’s hold on FX has waned as global rates gravitate towards zero, forcing the FX market to react instead to the far more ambiguous implication of QE. By contrast, other asset classes, notably equity markets, provide a cleaner mechanistic link between a given view and a price.
The conclusion is that even if we knew the outcome of future events with certainty, the FX market is not the best place to reflect those views. We have fallen to the bottom of the food chain. Read more
FX: it’s a funny old market and its drivers can be difficult to discern.
One way to try and pick out a few of them is to strip everything way and then stare fixedly at what’s left. Read more
US banks as one of the last big carry opps, really? Chart via Ralph Axel at BofA Merrill Lynch:
Yes, “L-troh”. So ubiquitous is the ECB’s three-year liquidity op getting that we’re turning the acronym into a word. Like Nato or Isda. So sue us!
With the second three-year Ltro on Wednesday, the release from the burden of the acronym has come just in time for another bout of guesswork on how ‘big’ it will be, and just what the ECB’s funding will be used for. Read more
A revival in the carry trade is emerging as traders are increasingly borrowing euros to invest in global assets, says the FT. Reduced expectations of a third round of quantitative easing of monetary policy in the US combined with predictions that the ECB will cut interest rates further are leading global investors to use the euro as a funding currency for carry trades. In turn such carry trades can spur a fall in the euro. Traders say this is one reason why the euro has been the worst performing major currency this year, while currencies that benefit from an improvement in risk appetite including the Australian dollar and the Mexican peso are among the best performers. The euro hit fresh 16-month lows below $1.27 on Monday before rising slightly in what traders said was largely covering of short positions.
The FT has already reported on how hesitant banks are about buying ever more sovereign debt. In fact they outright dumped €65bn of bonds in just nine months. Hopes that banks would hold the hand of the sovereigns that back them continue to dim, as the Sarko carry-trade looks increasingly less likely in advance of this Wednesday’s offer of cheap 3-year ECB financing.
The presumption that banks are going to use the 3-year Long Term Refinancing Operation (LTRO) to buy sovereign bonds comes not just from the dreams of certain politicians, but also from the observation that yields at the short end of peripheral curves have come in dramatically. Read more
Some €15-45bn for Spanish banks and their government’s bonds at least, according to Morgan Stanley’s Huw Van Steenis, who has just produced a very interesting note on the carry trade du jour – or to use its technical name the ECB’s 3-year LTRO.
The two 3-year long-term repo operations (LTROs) are key pieces of a welcome package to ensure that, even if term unsecured debt remains impractically expensive, Europe’s banks will be able to continue to fund their assets. But could it also be a backdoor route to help sovereign funding, as some policy makers hope? Read more
It’s baaack! The prospect of eurozone banks buying more sovereign debt to take advantage of new cheap one-year ECB liquidity, that is.
You’ll have heard that the ECB will offer not one but two one-year Long-term refinancing operations to banks before the end of 2011, following October’s meeting. Read more
Negative rates have arrived! In Switzerland, anyway.
Which means the risk of the Swiss franc becoming a funding currency for carry trade — à la the Japanese yen — is very real. Read more
It’s a changed, changed world.
The introduction of bail-ins and burdensharing means capital markets will never be the same. Read more
It’s Europe’s least-loved debt, after Greek, Irish and Portuguese of course. It puts the ‘I’ and ‘S’ in the porcine periphery acronym we’re not supposed to say. It’s Italian BTPs versus Spanish bonos.
And Italian government debt, or Buoni del Tesoro Polianuali, has had a tough time of it lately. Read more
How weak is the dollar?
A timely question asked by Goldman Sachs on Tuesday morning, what with the euro reaching a 15-month high of $1.45 earlier today. Indeed, on the face of it, there is weakness everywhere. Read more
For the commute home, where the carry trade means helping your better half unload the car in exchange for first dibs on the remote,
- The FT visits Bernie Madoff. Read more
Since March 11, analysts in Tokyo have widely predicted that the Japan’s triple disasters - earthquake, tsunami and nuclear plant crisis – would heighten risk averseness among Japanese investors.
Indeed, the publication on Monday of the Bank of Japan’s quarterly Tankan survey of business sentiment, while not as negative as feared, set off a whole new round of “gloom and doom” predictions, reinforcing the view that caution will dominate Japan’s investment outlook for some time to come. Read more
The billions of dollars in yen sold by the world’s most powerful central banks have sent a strong message to speculative investors, notes the FT. Those daring to bet that the Japanese currency will again test Y76.25, the record high against the dollar it hit last week before the G7’s intervention, better have deep pockets. Indeed, now that the world’s richest nations have pledged to back Tokyo in its efforts to halt the yen’s appreciation, some strategists are predicting a new set of trading patterns in foreign exchange markets. The yen, they say, could make a return as investors’ currency of choice for making so-called “carry trades”.
What’s that saying?
You wait for a Black Swan for ages and then three show up at the same time? Read more
And the carry trade/currency weirdness continues:
LONDON (Dow Jones)– U.K. bank Barclays Capital pulled yen prices off its Barx dealing system for a short period Wednesday, as the Japanese currency fizzed to its strongest levels on record, a person familiar with the situation said Thursday. In a spectacular move, the dollar collapsed against the yen at 2100 GMT Wednesday, sinking 4% to hit a record low of Y76.25. Read more
The yen reached historic highs against the dollar late Wednesday.
It’s currently hovering around the 79.10 to the USD mark. The chart of recent action is pretty special though. Compared to Wednesday’s drop, Friday’s move looks puny: Read more
BNY Mellon’s Simon Derrick briefly mentioned the carry trade last week.
This Thursday, the currency strategist is back with more detail Read more
Here’s an interesting view.
Is the search for yield getting in the way of all rational sense in the market? Read more
Here’s something to add to those lists of 2011 investment themes doing the rounds: whether we’ll get a full-blown comeback of the dollar carry trade in the new year.
Controversial, we know. Read more
Have you been using the Google Books Ngram Viewer? It lets you search for any phrase across vast corpuses of digitised literature throughout the decades.
It’s quite addictive. Read more
The bright side of bulging peripheral bond-bund spreads, courtesy of the strategists at Nomura (emphasis ours):
…as central bank policy provides more substantial support for the economy – especially via extensions of QE and liquidity measures – we see increasing carry opportunities in higher-yielding assets, e.g. investment grade credit and lower credit government bond and swap curves (EM and peripheral Europe)… Read more
The amount of money rolled from the European Central Bank’s 12-month Long-Term Refinancing Operation (LTRO) into its three-month one — an indication of banks’ demand for ECB liquidity — might not be too high, reports. And that’s because . . .the original tender was bid partly by stronger banks for carry trades and in part from weaker banks for funding needs. And this time round, demand for carry trade is much less likely. Read more