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FX carry trades are down almost 4% so far in August. This is their worst performance since last August (see first chart). Perhaps the summer month is cursed – more probable, though, is that vacationing traders leave the market prone
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FX carry trades are down almost 4% so far in August. This is their worst performance since last August (see first chart). Perhaps the summer month is cursed – more probable, though, is that vacationing traders leave the market prone to bouts of volatility. It hasn’t helped that the US-China trade war recently escalated (though President Trump seems to be backing down once more), and that the Fed was not as dovish as the markets were pricing.
Last year, the trade war (and the Fed) also had a major, negative impact on carry trades. Looking at a measure of trade policy uncertainty appears to show an inverse relationship with the performance of FX carry trades (uncertainty up, carry down: see second chart). Therefore, we will need to see a de-escalation for the performance of FX carry to improve. Early signs indicate that this is happening.
As for the Fed, this week’s Jackson Hole conference will give us some signs of how many cuts we will see this year. A dovish stance would certainly help carry. Importantly, it’s not just US policy that matters – a dovish ECB and BoJ also matter. And they have ultra-low rates.
So, watch trade and Fed for a possible post-summer bounce in FX carry trades.FX Carry Performance Trade War and FX Carry
Bilal Hafeez is the Editor of Macro Hive and can be contacted here
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)
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