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.
Volatility Threatens Carry Trade
Dollar Near Fresh Low
Tight range started on the asian session. Most of the big players are waiting for the month much anticipated announcement from the Fed tommorow. Next to focus is the non-farm payroll coming out on the first friday of November which is are expected to slip to 80.0k, versus 110.0k from last September.
The greenback remains under pressure as traders position ahead of this week's closely anticipated FOMC monetary policy setting meeting. Fed funds futures are fully pricing in a 25-basis point rate cut to 4.50%, thereby dragging the dollar to fresh record lows against the euro at 1.4437 and a new multi-decade lows versus the Loonie at 0.9576 and Aussie at 0.9270.
Although the Fed is largely expected to ease by 25-bp, the dollar's direction will likely be dictated by the accompanying FOMC policy statement and whether further easing can be anticipated. We look for the Fed to maintain a largely neutral stance in its policy statement, with an emphasis on the preemptive nature of the cut "to forestall some of the adverse effects on the broader economy", as stated last month.
