...my own frustration about this carry trade that i felt should have popped or corrected by now. in no way was it meant to be disrespectful. ..
.... hey, no issues with that. I agree that the current interest rate policy divergences will just let the market burn though levels after levels to exhaustion.
Even Central Bankers have a hard time accepting the extent of the carry trade; and by hiking rates as they all do now, they are obviously pouring oil into the fire.
See what the Kiwi Bankers tried- Pea shooters against the crowds?
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Currency Speculations
Central Bankers May Get It Wrong This Time
Sun, 24 Jun 2007 09:43:38 GMT
by Mihai Nichisoiu
Mihai Nichisoiu
On June 14th, the online edition of The Economist published an article titled 'A warning shot' - an attempt to see through the premises of the recent Reserve Bank of New Zealand's foreign exchange intervention which hit the currency markets in the early hours of June 11th.
The material is available here: economist.com. At some point the author writes, 'It was a well-timed intervention.'.
From a purely technical standpoint, I totally disagree. To me it looks like the New Zealand's central bank had too easily ignored an obvious, yes - although not yet parabolic - deal of strength that has been fuelling notable gains of the New Zealand Dollar against the US Dollar as well as via the currency's cross pairs. In other words, the New Zealand Dollar's ongoing uptrends may not have reached yet out-of-hand, rampant (and hence, potentially nearby notable exhaustion) stages; reversing or even decelerating those uptrends, not yet vulnerable, would require remarkable efforts and is probably too difficult to do at this time.
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Currencies
A warning shot
Jun 14th 2007
From The Economist print edition
New Zealand is one of many countries dealing with strong exchange rates
CONFRONTED by a growing army of speculators, on June 11th the Reserve Bank of New Zealand decided enough was enough—and let rip with the peashooter. It intervened in foreign-exchange markets to weaken a currency that had hit its highest level since it was floated in 1985. The bank struck after it had raised its official cash interest rate to a daunting 8% the week before, eager to halt rising inflationary pressures.
It was a well-timed intervention. Japanese savers, earning next-to-nothing in yen, have poured into investments based on higher-yielding currencies, such as New Zealand's. Other investors have also taken advantage of the “carry trade”, enabling them to borrow at low interest rates in yen and reinvest at higher rates overseas. Like almost everyone else, they were caught by surprise and the New Zealand dollar softened.
New Zealand, with the highest interest rates in the industrialised world, is a special case, but it is not alone in feeling the mixed blessings of a currency on steroids. Other countries with non-greenback dollars also have unusually strong exchange rates. Australia's dollar hit its firmest level in 18 years this year, and the Canadian dollar has risen 30% against its American counterpart in the last three years.
There are some common elements fuelling the strength. All have robust economies and respected central bankers. According to Stephen Jen of Morgan Stanley, they reap the benefits of being open, developed economies, yet partly thanks to the commodities boom, they enjoy some of the fast-growing attributes of emerging markets. Asian economies have snapped up dairy and wood products from New Zealand and metals from Australia, and have helped raise the prices of Canada's oil and natural gas, boosting export revenues. Cross-border takeovers are also putting upward pressure on currencies. The bidding for Bell Canada, the country's largest phone company, involves groups with both domestic and foreign investors.
A strong currency can be a curse for exporters, however. In New Zealand's case, the carry trade has given the kiwi dollar an extra upward push. With the yen nearing five-year lows against the American dollar this week, such trades may well continue.
As rising interest rates in some countries exacerbate the differences between high-yielding currencies and low-yielding ones, such as Japan's, New Zealand's predicament may become more familiar. Most nations with strong currencies should refrain from following its lead. After all, peashooters are of little use against a determined foe.
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