Carry-trade currencies — need the basics…again

[skipbreakfast]

I remember reading a valuable discussion in the old TAE blog comments section regarding “carry-trade currencies”. I can’t remember who wrote the lengthy explanation of how carry-trade currencies work and what the downside of them might be. I think it may have been el gallinazo. Anyhow, I didn’t fully understand the article at the time, since I didn’t know what a carry-trade currency was. But since then, I’ve learned some more and would love to read that explanation from the TAE blog again. Does anyone have it handy to re-post it or to offer a link to it?

I live in a carry-trade country (New Zealand), and just can’t imagine it offers a sustainable scenario long-term. But it is complex to say the least.

[el gallinazo]

Yeah, I wrote it. I have been saving some of my more (arguably) worthwhile comments since last August in a mailbox, but didn’t see it. Let’s use Yen at 1% and NZD at 5% just as an example. I think the most important point that I made was that unwinding a currency carry trade can become a positive feedback loop as in a death spiral. The reason for this is if the forex of the higher interest investment, NZD, drops hard against the lower interest investment loan, Yen, and these deals are always leveraged to the hilt, then these guys have to unwind muy pronto before they lose their shirt. But unwinding it requires that they sell NZD and buy Yen, which exacerbates the problem, so the first one to bail out gets hurt the least.

[skipbreakfast]

Thanks el g. It’s something I want to research further. The NZD has been riding high for the past couple of years. Which for an exporting country can’t be a good thing! I just feel like there has to be a catch–you can’t just offer these super high interest rates to the world, which are then exploited by holders of 0% currencies (like the US dollar or Yen) without attracting huge instability. But I need to understand the dynamics more. Something isn’t right here.

[el gallinazo]

What’s not right is the ZIRP policies of the Fed and the BoJ, and the near ZIRP of the ECB trying to keep their zombie, bloodsucking, Too Big To Jail banks alive. But higher interest rate countries can be smashed when things fall apart. Iceland is a perfect example. Huge carry trade before the implosion, which was built on a huge (if anything can be huge in a country of 300,000) corruption of its three major banks. BTW the Prime Minister at that time is at this moment on trial on criminal charges. The top Banksters are hiding out in London and the UK refuses to extradite them. The moral may be to take a hard look at the corruption of your local Banksters.

[skipbreakfast]

Interesting analogy with Iceland. I think there are some worthwhile comparisons with New Zealand. I’m not sure how “corrupt” the banks are, but they have a stranglehold on everything, and are woefully exposed to the Kiwis’ religious fervour for real estate.

[Author]

Posts