As global appetite for risk has rebounded after the Fed’s interest-rate cut, carry trades – whereby investors sell low-yielding currencies (mostly yen) and buy high-yielding assets with the proceeds – have resumed. The yen is back on the defensive and currencies of countries where yields are high, such as the Australian and New Zealand dollars, are rebounding. The Aussie dollar has bounced back from this summer’s 18% slide against the yen, while against the greenback it has reached a 23-year high of 90 cents.
But clouds are gathering over the carry trade. Interest rates are set to rise in Japan, while they are expected to fall in the US, and many are now also pencilling in cuts in Europe; the narrowing interest-rate spread makes the carry trade less profitable. Moreover, the high-interest rate economies – Australia, New Zealand and the UK – resemble the US with their property bubbles and indebted consumers, says Lex in the FT, so their rates could follow America’s downwards if their growth falters. Corrections in the overextended emerging market and high-yielding debt sectors, popular investments funded by the carry trade, would also temper the carry trade trend. Shorter-term, the credit crisis looks far from over, as FAZ.net warns, so renewed global jitters could well imply a rapid bounce in the yen as appetite for risk slides and rattled speculators unwind their positions.