The unwinding of carry trades may have gone too far
Aug 29 (Reuters) -The unwinding of carry trades may have gone too far, pushing higher yielding currencies much lower just before a series of expected easing cycles boosts risk appetite underpinning the currencies investors have sold.
In contrast, currencies they have purchased that will be undermined by monetary policy moves remain the best way to fund carry trades that should prosper if equity markets continue to rise on the sea of interest rates cuts now envisaged.
The division is extreme with the Turkish lira, Indian rupee and Brazilian real falling to, or towards, record lows versus the dollar. Mexico's peso - which was central to many carry trades - has collapsed, driving investors and speculators from long positions.
In contrast, the yen and Swiss franc and euro have shot higher as investment in the dollar is purged before the first move in the U.S. easing cycle.
Risk appetite remains robust, with stocks soaring and more cash heading into some carry trades, significantly boosting the value of the pound, South African rand and New Zealand dollar.
Expectations for a U.S. easing cycle that is likely to influence other central banks are acute, with the U.S. interest rate expected to plunge in the next year. Central banks in Britain, the eurozone and Switzerland are expected to follow suit, slashing interest rates that will support stocks and speculation in other financial markets.
Currencies much weakened in advance of this easing cycle may thrive during it, while those that are seriously undermined by easy monetary policy like Swiss franc, yen, Thai baht and Taiwan dollar, may end this cycle far weaker than when it began.
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(Jeremy Boulton is a Reuters market analyst. The views expressed are his own)
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