Are New Carry Trades Coming Soon?
04/25/2012 3:30 pm EST
Today’s extensive and unprecedented currency intervention by central banks is likely to pave the way for new carry trade set-ups in 2012 and beyond, says Daniel Hwang of FOREX.com.
We’re here with Daniel Hwang talking about the opportunities and risks involved with central banks getting involved with economic policy.
There’s a lot of central bank activity going on right now. We’re seeing the Bank of Japan, the European Central Bank (ECB) take more of a back-door easing approach, and there’s a lot of speculation wrapping up for the Fed to take on QE3. I think that opens the door for new potential carry opportunities.
Look for central banks taking opposite directions, tightening policy, and try to find the funding currencies through central banks that are starting or continuing to ease.
See related: The Forex Carry Trade Explained
There’s the headline central banks that are working on their currencies, like in the US and Japan, but then there’s always the subtext. This is kind of a remarkable period though, isn’t it, with central bank intervention?
No, it’s definitely an historic time in terms of central bank activity. We do have some of the larger, more advanced economies starting to ease and take on more of a direct intervention approach in terms of trying to support their economies.
Yet, what that does is potentially increase the risk for prices to increase in smaller economies. There are other central banks, such as Turkey, and I think Hungary is one as well, that have to fight inflation. So what they need to do then is take the opposite approach.
But that increases the expectations for the interest rate spreads to widen, and that should open up the door for some decent carry opportunities through 2012.
You mentioned those two countries and the risks. What about developing nations like Thailand, Indonesia, or in Malaysia? Are there opportunities in Asia, given that you have a relatively solid China that’s fueling growth, and you don’t have the risks that you have with some of the neighbors of the PIIGs?
Absolutely, I think there’s a huge amount of opportunity in Asia. We’ve seen Indonesia with capital inflows just pouring in through this risk-on period through the beginning of 2012. I think just because of that movement away from the source of systemic risk, that attracts the kind of investors and traders who look for yields.
So Asia has that allure of yields and also has the safe-haven appeal. We’ve also seen Latin America, Mexico, and other parts of Latin America—Brazil also—attract a decent amount of capital inflows throughout this period as well.