Tag Archives: carry trade

A Tale Of Two Bond Curves: Malaysia vs Indonesia

Thanks to Denise Law for drawing my attention to this…

Malaysia government bond yields fall post-elections:

Govt bond curve - Malaysia May 2013

While Indonesia government bond yields rise after S&P reduced its outlook on Indonesian credit from positive to stable:

Govt bond curve - Indonesia May 2013

Related reading: How Singapore’s currency club fell apart

Plain English: Some Thoughts On Bernanke’s LSE Speech

2013.03.26.Bernanke Plain English-helicopter benBernanke gave a speech at the London School of Economics yesterday which is grabbing a lot of attention. Those who have heard or read some of his other non-Fed public lectures over the past few years will recognize that he spent about half of it reviewing some of his favorite historical lessons, mostly sourced from his pre-Fed academic work. But there were some new statements to add to this mix. My interpretation of some of the key themes:

  • The current financial crisis is in fact a classic panic: a systemwide run of “hot money” away from assets whose values suddenly became uncertain.
  • That said, there were some different bells and whistles this time, notably the introduction of new financial instruments, more varied actors beyond just banks and (in my opinion) most vitally, a scale and complexity altogether new.
  • Currency war, which Bernanke chooses to refer to as, “competitive depreciation of exchange rates”, is similarly not new.
  • The accommodative monetary policies central banks around the world have been implementing (read: zero interest rate policy) to support growth do not constitute competitive devaluations, currency wars or whatever term you prefer. The primary reason for this is that domestic demand counts for a lot more than exchange rate meddling and in any event when competitive economies both devalue their currencies, whatever effects result from these devaluations effectively cancel each other out.

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The Carry Trade Is Dead. Long Live The Carry Trade.

2013.03.13.USD MXN BRL Carry TradeMy latest Seeking Alpha article is out, in which I try to make sense of why the Mexican peso is strengthening on the heels of an interest rate cut by the Bank of Mexico on Friday. And the short answer is that the carry trade is dead. Read the rest here, but what I can add to this argument is actually something that I’m surprised nobody has taken me task for in the comments section yet and that is this: the carry trade isn’t entirely dead. Brazil is in all likelihood about to raise rates again and the expectation is that this is going to strengthen the real.

Which raises the next question: Why is the Mexican peso resorting to the theory of interest rate parity while the Brazilian real is is adhering to the anti-theory of interest rate parity in the form of the carry trade?

Stay tuned.

Carry trade returns: winners and losers as of mid-November

From the Hindu Business Line:

Though this comes from a story headlined, “Rupee depreciation erodes carry trade returns”, it’s interesting (though perhaps not surprising) to note that Asia is nowhere in this table.

Poland’s conundrum: hard currency loans, carry trade, inflation, Eurozone crisis

Certain email conversations I’m having lately (which appears to be the preferred mode of communication so far for Diverging Markets readers) lead me to believe that the perils of hard currency debt for developing countries are either not fully understood, viewed as someone else’s problem, or both. At the risk of coming off as though “I told you so”, Reuters has two brief blurbs today concerning the situation in Poland that spell out what I’ve been trying to explain to developing country borrowers for at least half a decade now:

There are two hurdles. One is inflation. Price growth is running at 4.3 percent, well above the 2.5 percent target set by the inflation-targeting central bank. That was what triggered the May rate rise. Second, in Poland, as in Hungary, the central bank cannot afford to let the currency weaken much. A third of government and corporate debt is hard currency, while half of all mortgages are in Swiss francs. A fall in the zloty, caused by a rate cut, could raise defaults and problems for the banks. Continue reading

How the Global Carry Trade Distorts Reality

This is an ongoing conversation I’m having with a few people and there’s no way I’m going to get it all out now, but the core thesis is that “the market”, whatever that even means any more, is confusing optimism and relative value. Since I reside in Mexico, the evidence of this thesis is most obvious to me in the Mexican context, but conversations with trusted sources elsewhere in the world have led me to believe that this not just a Mexican thing but an Emerging Markets thing. And as of today, it seems even SoCal demigod and occasional Egyptian presidential contender Mohamed El-Erian agrees with me: Continue reading

George Soros in Plain English: Eurozone crisis goes back to the future

I finally had time to read the George Soros speech in Italy a few weeks ago that put everyone into a frenzy for about 24 hours until they all got distracted by the next big thing. At the same time, a colleague emailed me the following graph, which I have not yet been able to independently verify, but if this is true, WOW:

Once I got over the initial shock of looking at this chart, I thought it interesting to note that Continue reading

PIMCO in Plain English: Mohamed El-Erian looks to the future and sees…

Double, double toil and trouble
Fire burn, and cauldron bubble.
— Macbeth Act IV, Scene I

Mohamed El-Erian recently deconstructed central bank activism to an audience of…central bankers, at the St. Louis Fed. Really, the core fight here is about how much of a visible and active hand central banks should have in overseeing a country’s economy. And this crossroads is exactly where civilized conversation, particularly in the U.S. context, particularly in an election year, comes to die. So let’s put aside our politics for a moment and look at this as aseptically as we can.
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How Risky is Emerging Markets Debt?

Acapulco Cliff Divers | Source: Wikipedia

Local currency debt is the fastest-growing segment of the Emerging Markets debt asset class, according to a new report from Prudential Fixed Income. Mind you, the entire debt asset class isn’t very extensive—-it’s basically either local currency debt or hard currency debt. Nevertheless, the report gives a good overview of how the entire EM Fixed Income universe arrived to where it is today, but I think really understates the risks facing the sector going forward from here. First, some basic stats:
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It’s Not a Currency War. It’s a Currency Revolution.

This was a big week for central banks in Brazil, Indonesia, Malaysia, Peru, Poland and South Korea. Each one updated policy rate decisions concerning the price at which each lends short-term money:

Brazil: 75 basis point cut. Benchmark overnight rate adjusted from 10.5 to 9.75 percent.
Indonesia: no change. Benchmark overnight rate still 5.75 percent.
Malaysia: no change. Benchmark overnight rate still 3 percent.
Peru: no change. Benchmark rate still 4.25 percent.
Poland: no change. Benchmark seven-day rate still 4.5 percent.
South Korea: no change. Benchmark seven-day repo rate still 3.25 percent.

The most significant was without a doubt Brazil, so I’m going focus on Brazil today and address the other five another time. Expectations in recent weeks held that Brazil would enact a 50 point cut up until the eleventh hour when certain stakeholders clamored for more. In the end, the central bank went for 75 points. This 25 point discrepancy has bigger implications than meet the eye.
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