Nouriel Roubini's Global EconoMonitor

RGE’s Wednesday Note – The Carry Trade in 2010

A couple months ago, in a widely read FT op-ed, Nouriel Roubini warned that the “mother of all carry trades,” one funded in U.S. dollar denominated debt, could pump up asset bubbles around the world. This Monday RGE released two new reports, both available exclusively to clients, forecasting where and how this trend might unfold. Our macro analysis, “Carry Trade Hotspots: A Currency-by-Currency Forecast for 2010,” estimates the interest rate paths and currency trends for several potential carry trade funding and recipient currencies. RGE’s strategy team then looks at implications of these potential rate moves for investors in a parallel analysis, “Come to Mother: An RGE Strategy for the 2010 Carry Trade.”

When uncovered interest rate parities break, investors can borrow money in a low interest rate currency (like the U.S. dollar), then loan it out again in a currency with higher interest rates. The “carry,” or the return from this investment, equals the difference in yield between the funding currency instrument and the destination currency instrument. “Positive carry” occurs when the interest rate received surpasses the interest rate paid to fund the investment. “Negative carry” is the opposite. Because the carry from a single trade is often small, carry trades are usually conducted in large volumes through leverage or are held for relatively long periods of time (months or years) so that the small amount of rollover interest collected on a daily basis can add up to a worthwhile amount of passive income.

As both new RGE reports highlight, we expect the carry trade to heat up as 2010 progresses, as policymakers hold rates at zero or low levels in many advanced economies, while inflation leads to further rate hikes in emerging market and commodity-driven economies. We encourage clients to examine these papers for more details on hot carry trade destinations for 2010.

17 Responses to “RGE’s Wednesday Note – The Carry Trade in 2010”

GuestJanuary 6th, 2010 at 2:05 pm

with the redesign it would appear that they wanted to go upmarket and focus more on their proprietary content and less on user interaction i.e. they could have put a link in the navigation bar on the main page but chose not to – to their credit they still allow limited free access and at least the comment section is still here

TAJanuary 7th, 2010 at 11:02 am

I found the original RGE blog in Aug 2007 and read it faithfully each day until sometime in 2009 when a paid subscription was required for blog/comment access.I posted sparingly because the site attracted some very bright and insightful minds that held high expectations for their fellow contributors. For example, it was not uncommon for regular contributors to request (require) their fellow contributors to provide links to substantiate posts. If no link was provided, the post was dismissed as hearsay.The previous format also promoted a high level of interactivity among contributors. It was common for threads to have several hundred posts, and typically several threads were released each week. Prof. Roubini was quite prolific at times.Unfortunately the new format seems to promote diffuse proprietary content at the expense of community interaction. Few threads seem to attract much discussion, and what little there is, generally lacks the emphasis on depth and substance found in 07’ & 08’.Perhaps the level of community interaction will increase once everyone gets comfortable with the new format, and a new discussion protocol emerges (i.e. confining daily discussion to only one thread like the current Nouriel Roubini Economonitor post).I certainly hope so, because I sense the changes discussed here several years ago are only just beginning and would appreciate the community’s insight on how to negotiate them successfully.

GuestJanuary 7th, 2010 at 4:07 pm

Well put TA. I too hope that the community continues to contribute their insight on this blogging platform.The new Roubini Global Economics Format actually seems to have made the EconoMonitors (their word for blogs- which by the way are all still free to read and comment, though some of their proprietary pieces are occasionally teased on the EconoMonitors and appear to be for clients only. But to comment you just need to register, which is free- sites occasionally do that to limit the spam)more prominent.There is an Economonitor tab in the navigation bar and an EconoMonitor homepage.Let’s get the threads going! I do miss the Professor’s regular analysis and banter (He is probably busy writing a book, teaching, and spreading the gospel), but a lot of these pieces are very interesting and informative.

PeterJBJanuary 6th, 2010 at 3:07 pm

Mish, the Taylor Rule uses the GDP deflator, which is worse.I don’t have the work formalized yet, and might never get it to a suitable presentation for peer review, but there is a supportable case to use bank credit growth and government deficits less production as a reasonable proxy for an “inflation” index sufficient to arrive at a “natural rate” of interest (or perhaps a clearing rate of interest for savings in terms of investment and production).The problem with this approach for government and central bank money printers is that the “natural rate” would be somewhere in the 4-6% or perhaps 7-10% range, which would virtually preclude the ability of policy makers and Wall St. to create lasting asset bubbles and wars as economic policy.In an idealized world (not on this planet or in this lifetime, to be sure), the yield curve would be flat (or flatter) and the term structure would reflect a rate of interest sufficient to encourage borrowing at a level supplied by savings and at a term at which the debt would pay for itself from production plus replacement.However, that rate of growth is well below 6-7% nominal and ~3% real output. Rather, the sustainable rate of growth is probably no more than ~2% real (doubling time of 34-35 years, which is approximately a human generation, sufficient time to allow for the production from, and replenishing of, aquifers, forests, and arable land via rotation, etc.) with little or no sustained price inflation from the growth of money and the necessary price inflation to service the expanding debt.Financial intermediaries in such a system would not be permitted to create money inflation to capture an increasing compounding share of returns via financial rents from future labor and production; rather, they would make money from custodial and service fees, and/or from relatively short-term, self-liquidating loans backed by large equity/collateral stakes.Taylor , NY Times, Dean Baker Call Out Bernanke hum

PeterJBJanuary 6th, 2010 at 6:28 pm

“Given the low level of competence among politicians, every American should become a libertarian. The government that governs least is certainly the best choice when fools, opportunists and grafters run it. When power is for sale, then the government power should be severely limited. When power is abused, then the less power the better.” — Charley ReeseReactionary Liberalsby Towner Phelan on January 6, 2010[American Affairs, 1947]The American tradition is the “liberal” tradition, but when “liberal” is used to designate the views of Henry Wallace, we are not even aware that the word has been twisted to mean its exact opposite. For some three hundred years the term “liberal” has expressed a philosophy which is in direct conflict with the philosophy of those who, today in the United States, term themselves “liberals.”extract from Mises Daily newsletterHo hum

PeterJBJanuary 6th, 2010 at 6:48 pm

It is now totally clear for all to see that the sum game has degenerated into everyone for themselves, bullsh*t (store high in transit) and lies, er, of course, in a milieux or saturated solution, cum environment of Hanlon’s Razor:”Face it; the Obama administration is less interested in engineering a strong recovery than they are with micromanaging a protracted downturn. That’s because a long drawn-out mini-Depression puts the Rubin troupe right where they want to be—with one hand choking the life out of the economy while the other steals whatever is left in the national vault…. Finally, in an increasingly interdependent world, transnational issues key to all of us can only be addressed through effective global governance.” Now I need to know if he actually said this without breaking into shrieks of laughter, or was he just laughing normally?”Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone.” John Maynard Keynesfrom: Wall Street PoltergeistThe Return of Robert RubinBy Mike Whitneyemphasis mineand they call it ” the science of economics” – SOLHo hum

The AlarmistJanuary 7th, 2010 at 2:06 am

No, they don’t want to micromanage a protracted downturn. They merely want to micromanage every aspect of our lives, and the downturn that will spread due to things like Obamacare and Cap-n-Trade is itself a further means to that end.

GuestJanuary 7th, 2010 at 3:35 pm

Uh..Oh…Foreign central bank U.S. debt holdings fellNEW YORK, Jan 7 (Reuters) – Foreign central banks’ holdings of U.S. Treasuries and agency debt at the Federal Reserve fell in the latest week, data from the U.S. central bank showed on Thursday.The combined holdings of Treasuries and agency securities by foreign central banks at the Fed fell $5.922 billion to a total of $2.953 trillion in the week ended Dec. 30.Treasuries held by overseas central banks at the Fed fell $2.26 billion to total $2.187 trillion.Foreign central banks’ holdings of securities issued or guaranteed by the two biggest U.S. mortgage financing agencies, Fannie Mae (FNM.P) and Freddie Mac (FRE.P), fell by $3.662 million to $765.943 billion in the latest week.Overseas central banks, particularly in Asia, have been huge buyers of U.S. debt in recent years and own more than a quarter of marketable Treasuries. China recently overtook Japan as the biggest such buyer.

PeterJBJanuary 7th, 2010 at 5:21 pm

That moment when you suddenly understand that your “leadership” has reached its intellectual limitations and is struggling to even tie its own shoe laces: or, the ‘knee-jerk moment’.”President Nicolas Sarkozy instructed his finance ministry to examine the merits of a tax in response to complaints from the French media that Google and other sites are generating advertising income using their news and other content. He also called for an inquiry by French competition authorities into a possible “abuse of dominant position” in the advertising business of big internet sites.”And in August the National Library of France triggered a furore among the literary establishment – and a government review – when it revealed that it was opening negotiations with Google about a contract to digitise part of its collection,… rather than using an under-resourced French public sector alternative.” (emphasis mine) Question: Perhaps they are referring to basic “leadership” intelligence here?Sarkozy is and has always been a flake.Keywords: flake | under | Grandes écoles (which are socking it to him) | tax | -jerk | limitations | “leadership” | hum

The AlarmistJanuary 8th, 2010 at 2:11 am

Perhaps, but that is not Sarkozy flakiness, rather it is French flakiness. France is the nation that publicly pans McDonalds while at the same time being its number 2 source of world-wide sales. The French have a difficult time accepting that the Lingua Franca is now English and not French.Ho hum indeed!

blindpersonJanuary 8th, 2010 at 7:16 am”the quantity of the ‘money’ supply is out of control!”.”we didn’t understand a word he said… so we hired him.”anonymous senator upon confirming alan greenspan.bill still, paraphrased.’money masters’ and ‘the secret of oz’ videos..http://economicedge.blogspot.cohttp//