Volatility Threatens Carry Trade

Advocates of the carry trade have long argued that the only thing that could possibly put an end to their fun would be a significant rise in Japanese interest rates, which seems quite unlikely at this point. However, a new threat to the carry trade has emerged: volatility. Global capital markets have see-sawed over the last few months as credit concerns have surfaced, often related to America's housing bubble. This month, the Australian Dollar and New Zealand Kiwi have been the two worst performers among the world's 17 most actively-traded currencies. This is notable because these two currencies are most likely to be on the long end of carry trades.

Bloomberg News reports:
"The currencies also slid against the U.S. dollar as Citigroup Inc. said it will report as much as $11 billion in additional writedowns, reducing demand for so-called carry trades".

source: Forex Blog

With all this noises coming out lately, I think we should go easy now with our inverse hedge positions.