Call me crazy but our new G7 Carry Trade Index is rapidly looking more and more like a BTFD Index, if you understand my parlance. It would seem that the indicator may truly be living up to its intended vision – ie having some sort of true measure of the ongoing appetite(s) for risk in the market and ignoring some of the noise and set-backs along the way.
Snapshots Capture Individual Pictures of the Market – Not the Whole Story
If you have been following our development of the new financial transactions monitoring model, you will recall that it takes a peek on a minute by minute basis of completed transactions, sums up a score and spits it out – accumulating a comprehensive total along the way. What’s interesting about the financial market developments of the last few weeks is the sudden, sharp pullbacks amongst the global carry trade currencies (or more toward strengthening of the funding currencies). These sharp pullbacks tend to happen in a matter of seconds, lasting a couple of minutes tops – wiping out millions in equity accounts in that short time. If these were more forceful long-term moves then further losses would follow on subsequently and the resulting cumulative score would continue to fall. That has not been the case with the present time period.
Present State Showing Risk Appetite Back-filling Gaps Down – a.k.a BTFD
So what does a trading environment look like when the order of the day is BTFD in the face of several sharp downturns? I thought you’d never ask! Take a look at the chart above for the most recent two week period. We had several crisis related crash events in China, Japan, and (to a lesser extent) the US equities markets. Most prominent among these were the comments by Ben Bernanke post-FOMC meeting June 19th. (1st red arrow). The fall from his comments shortly after 2pm lasted right through the US equity market close and into after-hours trading. After that however, something happened: the forex market got amnesia – ignoring the results in equities markets and immediately began ramping upward again. Foreign markets took a nose-dive overnight following the chairman’s comments – fueled further by speculation about the timing of Tapering QE (2nd red arrow).
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Still however, once the initial shock passed, it was very quickly back to “business as usual” in the (best I can tell) money printing business in the forex markets – helped along the way by multiple Fed personalities to talk down the tone of the tapering statement. Each short sharp dip appears to be resulting in a further buying opportunity for the leverage junkies. Even while equities markets continued to sputter and show weakness, the forex carry trade printers kept running. Reminds me of the charts depicting the lives of turkeys leading up to Thanksgiving in Nassim Taleb’s great work, The Black Swan. Everything looking steadily brighter in a pretty much linear fashion until the axe falls.
Does the G7 Carry Trade Index Indicate Increased Imbalances?
It remains to be seen what the future holds for forex carry traders. Each precipitous drop in USDJPY (for example) has been met with mouse-like nibbling higher. The same holds true for similar pairs such as AUDJPY and AUDUSD. While the overall result has been falling, it seems the forex vultures sit down to pick at the slain carcasses of blown up margin positions – backfilling (some of) the drops. Each successive fall has not resulted in the resulting gap being completely filled (climbing G7 Carry Trade Index be dammed) and one wonders when the carcass will have finally been picked clean when we all get the axe.
More info on the Carry Trade: