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Strategies & Market Trends : Mish's Global Economic Trend Analysis
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To: John McCarthy who wrote (104464)11/18/2009 5:51:09 AM
From: The Vet2 Recommendations  Read Replies (2) of 116555
 
The other side of the carry trade is playing out again in Australia, one of the favourite recipients of the Yen when the carry trade originated in Japan, and being repeated now with US dollars.

The huge inflow of "hot money" forces up the prices of assets, stocks, commodities and services in Australia along with the Aussie dollar giving the originators gains in both the asset and the currency. Being a small market the constant inflow of USD being converted and invested in AUD assets has caused Australia to be one of the few countries where the houses are still going up in price and rising inflation.

The Australian Reserve bank's response to this is to raise rates which in turn makes the currency even more attractive and more money to flow in.. However as it happened before when the Japanese played the carry trade game, once they either decide, or are forced, to repatriate their funds, there is a huge sucking sound as assets are sold, Aussie dollars sold and converted back to the source currency and the positive reinforcement of a waterfall collapse becomes a reality.

Last time it took the Aussie dollar from almost parity with the USD back to 50 cents to the USD in a few months and this time it could be worse when it breaks.

Because the USD carry trade is probably an order of magnitude greater than the Yen carry trade was, the effect on the smaller so called "safe haven" currencies will be dramatic for these countries as will be the speed and extent of the losses of that "hot money" as it attempts to escape back home though a rapidly ever narrowing doorway...
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