Is the Carry Trade Finally Rolling Over?

It has been weeks since the last time the G7 Carry Trade Index took anything resembling a breather or anything other than a momentary down turn however a quick glance at the chart this morning is showing signs that maybe after the last couple of weeks of BTFD activity may finally be over… for now. Oil prices spiking over $105/barrel and gas prices following suit are likely to cause real harm to the real economy – in ways that simply printing more money can’t fix.

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Early Summer Romp Carries Index to Higher Highs

Even though we launched the G7 Carry Trade Index in mid-May of 2013 we honestly did not expect to see so little variation in the results. Although there was quite a bit of volatility intially, with the cumulative sum swinging wildly between +/-3000 initially – it has basically been off to the races ever since Fed Chairman Bernanke pulled his foot out of his mouth (with the help of his colleagues at the Fed) with regard to tapering. The market (for now at least) has taken on faith that asset purchases are pretty much going to continue ad-infinitum due to the threat of catastrophic blow-out of the market if they stop. The initial reaction to Chairman Bernanke’s statement about tapering was so over-blown that it very nearly caused the exact scenario (market implosion) that it was trying to avoid. Since then it’s been one dovish Fed comment after another. Finally after several weeks’ of lopsided results we may finally be seeing a top in the index – or at least a pause for a breather after such an unexpected ROMP through the currency markets. See the results in the chart below.


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What Is Next Is Anyone’s Guess

My thinking is the pause after the massive runup has everything to do with earnings results do out this week. Alcoa posted less than stellar figures to open earnings season and now the global currency traders are taking stock of what follows. For my own part this market runup has had everything to do with QE infinity and less and less to do with real-world economic growth. Face it – more paper money in circulation (all over the globe) chasing fewer assets (due to large debt-financed buy-backs of stock – particularly in the US), and you have a recipe for rising (nominal) asset prices around the world. Unfortunately at some point the money faucet is going to be shut off, and with no real world economic growth to fill in the gaps of this ginormous bubble we’ve blown… well, you know the story.

2 thoughts on “Is the Carry Trade Finally Rolling Over?

  1. So post Bernanke press conference after hours we have our answer… NOPE!

    Larry Kudlow must be turning over in his grave… oh wait, Larry isn’t dead but watching the destruction of King Dollar has to be killing him.

  2. Geez! No sooner do I talk about Kudlow his show gets the sack! Truth be told it’s more likely a ZeroHedge effect but god, I geniunely liked the guy. Hopefully he’ll bounce back somewhere else.

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