did I say USD go down? nope
in time of stress, $USD & $JPY both up
But $JPY would be up more in severe plunge
FX carry trade unwind
Everything in FX is driven by "seemingly risk-free" carry trade.
like shorting $VIX? risk_free? until it isn't $XIV
huge hidden left tail risk
in time of stress, $USD & $JPY both up
But $JPY would be up more in severe plunge
FX carry trade unwind
Everything in FX is driven by "seemingly risk-free" carry trade.
like shorting $VIX? risk_free? until it isn't $XIV
huge hidden left tail risk
Below showing "what carry trade gone bad" looked like in time of crisis, extreme fear
Carry trade unwind, fast & furious
Carry trade: short JPY to fund long USD & SPX
turkey 1001 day
elevator down
But $BOJ would step in and intervene at key support lvl
Carry trade unwind, fast & furious
Carry trade: short JPY to fund long USD & SPX
turkey 1001 day
elevator down
But $BOJ would step in and intervene at key support lvl
Carry trading is best known in the FX market. It involves borrowing in a currency where interest rates are low, parking that money in a currency with higher rates, pocketing the difference, or “carry.” Ideally, you get paid for doing nothing.
The primary risk is that the currency in which you borrow starts to appreciate at the expense of the one in which you have put your money, huge left tail risk, that can generate huge losses in a hurry.
One big problem with carry trades is that they become self-fulfilling.
One big problem with carry trades is that they become self-fulfilling.
In practice, any increase in volatility or perceived risk by the $VIX - spells doom for the carry trade
See below chart on VIX since 1990
When in Euphoria (green) zone, carry-trade is seemingly risk-free, like shorting $VIX
But how about the red zone?
See below chart on VIX since 1990
When in Euphoria (green) zone, carry-trade is seemingly risk-free, like shorting $VIX
But how about the red zone?
Logically if rates are often negative, then carry becomes very attractive. You are being paid to fund trade with a negative-yielding currency (JPY). The point is to find something that will safely offer a positive yield. That has meant some more exotic versions of the carry trade
From the above VIX 10-yr cycle chart, year 2017 proved to be one of phenomenally low volatility (VIX ~10), phenomenally high returns for carry trades. That changed when volatility spiked in Feb 5th 2018 - #Volamgeddon
Causing many carry trades & VIX short trades (XIV) busted.
Causing many carry trades & VIX short trades (XIV) busted.
Carry trade becoming self-fulfulling like $XIV, a sensible strategy when you are being paid to borrow, but if too many people try to do it at the same time, the impact of further spikes in volatility could be alarming
Robinhooders beware
Who are on the other side of the trades?
Robinhooders beware
Who are on the other side of the trades?
Who are the enablers of the "carry trade"?
Yes, the Fed & world CBs, reckless "easy money" policy with ZIRP & NIRP, encouraging excessive risk-taking & moral hazard.
Now, with buying junk bonds and expanding municipal bond buying programs, creating more bubbles and inequality
Yes, the Fed & world CBs, reckless "easy money" policy with ZIRP & NIRP, encouraging excessive risk-taking & moral hazard.
Now, with buying junk bonds and expanding municipal bond buying programs, creating more bubbles and inequality
