Join the entire analyst team from DailyFX.com to discuss the viability of the Carry Trade.

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Thank you for this great discussion.

Interesting to listen to you

The poll results at least so far show that everyone overwhelmingly believes that the carry is still alive which most likely means that further liquidation is due

While we've seen the yen pairs (EURJPY, USDJPY) and the Dow take a hit in recent days, I think carry trades remain in play. However, if the Fed surprises the markets and decides to leave rates unchanged on October 31st, I believe this will trigger another bout of risk aversion that could lead carry trades to tumble quite a bit.

The current state of markets has basically left different asset classes completely linked to one another. In this case it means that the Dow Jones Industrial Average has a very strong correlation with broader carry trade gains. The chart below highlights just how strong this correlation has become.

Asking whether the carry trade will continue higher is the approximate equivalent of whether the Dow will continue higher.

Attached Images

 

All of these bounces in the carry look very corrective in nature suggesting that we may at least retest the lows. This pretty much points to the Dow going lower.

Interestingly enough the guru of Dow Theory Richard Russell
http://www.marketwatch.com/news/stor...5C95CAFB71E%7D
thinks we are going to test 200 SMA which means that EURJPY may see 159

The ratio of long to short positions in the USDJPY stands at 1.56 as nearly 61% of traders are long. Yesterday, the ratio was at 1.73 as 63% of open positions were long. In detail, long positions are 5.8% lower than yesterday and 15.5% stronger since last week. Short positions are 4.7% higher than yesterday and 9.0% stronger since last week. Open interest is 1.9% weaker than yesterday and 20.8% above its monthly average. The SSI is a contrarian indicator and signals more USDJPY losses.

Source: FXCM Dealing Desk

For historical data and the latest charts based on the SSI please visit http://www.dailyfx.com/story/strateg...903946044.html

For information on an FXCM Managed Fund that takes advantage of the SSI, please review our Sentiment Fund at: http://www.fxcmmanagedfunds.com/ or call +1 646-432-2968.

According to Citi Group it's on its way back!

Attached Files

Carry's coming back.pdf (193.1 KB, 655 views)

Interesting argument - they are basically making the Pollyanna case that better regulation and improved information flow and risk management will keep global economy buoyant and the environment for the carry trade attractive. Who ogrees with that?

Don't think anyone can safely say the carry trade will ever be dead, at least until the BoJ signals rate rises are to be expected consistantly in the future. Cheap yen has to change for the carry trade to lose all it's luster. Until then, it's really only about pricing risk.

I'm personally not sure that I do. The reason the carry trade took a dive was largely because people had to liquidate their most liquid position to fund loses/margin calls in other less liquid markets. Once this has started to subside money once again flows into the carry. The thing is, if the stock market were to begin performing poorly we could see a similar carry liquidation again. But yes, as long as the BoJ keeps rates low and others their rates high there will always be a return to the carry.

One possible bias to not forget in the article: this came from Citi Group, one of the founders of the Super Fund which has been sharply criticized. Pollyana may be the best way to look at the whole situation...

I actually had to look up Pollyanna because I had no idea what you guys were referring to.

In any case, I think that the carry trade may be on shaky ground through upcoming trade. To say that it is "dead" is definitely overblown, but I'm not exactly optimistic that we can continue to see JPY weakness.

Credit and lending markets continue their recent slump, and stock markets seem to be catching on. Until we see improvement in such a key sector of corporate America, I will remain bearish stocks and, by extension, the carry trade/risk sentiment.

Carry Positioning

63% of retail traders are long USDJPY (long to short ratio is 1.68). Moreover, since last week, retail has been aggressively buying USDJPY (long positions are up by 30.6%). In the past, when retail was long and buying more, the USDJPY has sold off in the following days. The SSI gives us a STRONG SIGNAL TO SELL USDJPY.

Source: FXCM Dealing Desk

For historical data and the latest charts based on the SSI please visit http://www.dailyfx.com/story/strateg...903946044.html

For information on an FXCM Managed Fund that takes advantage of the SSI, please review our Sentiment Fund at: http://www.fxcmmanagedfunds.com/ or call +1 646-432-2968.

You can see what I'm referring to in greater detail in our recent "Watch what the Fed watches" report:

http://www.dailyfx.com/story/tophead...248941403.html

Scroll down to see sections on corporate lending for an elaboration on my previous points.

This artcile says that Wall street is screaming for 50bp cut. If that happens expect teh high yielders to hit yearly highs
http://www.bloomberg.com/apps/news?p...d=ab01iQ2rYP6Y