The carry trade is back and it’s the main theme in the forex market, according to Deutsche Bank.
It explains the outperformance of high-yielding currencies and the decline of funding currencies like the yen and US dollar.
On March 11, the carry trade was unwound en masse because of fears that the yen will surge after Japan’s tragic earthquake. Moreover, hawkish rhetoric coming out of a few Federal Reserve officials dampened the dollar-funded carry trade.
Now, G7’s intervention put a firm ceiling on the yen and it has emerged that Bernanke – who seems to have control of the FOMC – has no intention of raising interest rates anytime soon or curtailing QE2.
The carry trade, therefore, is back.
Deutsche Bank noted that the carry trade had lagged the global equities market for several months. Usually, equities and the carry trade rally in sync on the back of global risk appetite.
However, after the G7 intervention on the yen, the carry trade has now “caught up.” Now that the carry trade has “caught up,” Deutsche Bank expect it to rally at a slower pace.
Below are two charts. One is the Deutsche’s chart showing the “catching up” of the carry trade to global equities. The second is the surge in AUD/JPY after the March 18 G7 yen intervention.
Click here to follow the IBTIMES Global Markets page on Facebook