More Weakness in Carry Trade.
The carry trade has been a losing proposition for some time now and latest data shows that it became even worse, at least according to UBS. Its UBS V24 Carry Index (similar to the Harvest Index), which tracks the performance of carry trades in 24 currencies with higher yields has tumbled 2.6% this month after losing 2.2% in August and 3.1% in July, the biggest back-to-back monthly drop since May and June 2010. While the Index was mildly positive early in the year, gaining 2.1% from the end of January through April, 2011 is shaping up to be another losing for the carry trade, just 2010 when the Index lost 2.5% for the year.
Certainly it was possible to select a currency pair with a positive carry which appreciated to date, for example the EUR-NOK, but as a group this type of Forex play has not been paying off. Recent losses can be blamed by strength in the USD and the JPY, the two most popular funding currencies in the strategy. In addition, “risk on” mode also hurts the carry trade, as it tends to benefit funding currencies and markets have been in this mode more often than not lately.
This chart shows the UBCIV24 for the past few years and as we can see it is in shambles. As a matter of fact at current reading of 453, it is almost as low as just after the 2008 market panic, which included the historic “unwind” of the carry trade. More weakness in the AUD, the highest yielder among majors, especially in relation to the USD and the JPY, could depress the index even further. A dip under 422, the low from 2007, is certainly possible at this stage.
Among other things, I am considering a short trade in the NZD-CAD, using the 4H chart. The price established new support here at 0.8115 so my sell order is just below it at 0.8112. Cracking this support should allow for another selloff, to perhaps as low as 0.8000. Because the time frame is fairly large, this trade could take some time….
Mike K.
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