from Follow the Money

Carry, carry, carry …

February 12, 2007

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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The debate over the size of the yen financed carry trade is far from settled.   Former (“The Yen carry trade is on in such huge size”) and current traders (“real money investors ain't short yen and that even the gross -- as opposed to net -- spec yen longs on the IMM are above their 1,3, and 5 year averages”) do not necessarily agree. 

The biggest carry trade, no doubt, is the carry trade within the G-10.  Think borrowing yen to buy US dollars, Australian dollars, pounds and even euros.   G-10 currencies generally float, which means that price moves are often the best guide to flows. 

But there is also a carry trade that involves emerging economies.    That trade can be funded in dollars, euros or yen.   That trade also leaves traces – often in the form of rising central bank reserves.   More money coming in often means faster reserve growth

And all available data suggests that the scale of the carry trade picked up recently.    
Look at Brazil.  Its reserves rose $2b (from $91.88b to $93.82b) last week, after rising by nearly $2b the preceding week ($90.03b  to $91.88b).

Look at Turkey.  We don’t have data for last week (yet), but the week before, Turkey’s reserves rose by (gulp) $2.7b – going from $61.4 to $64.1b … 

Look at India.  The reserve bank of India supposedly bought $1.5b in the market last week.  That comes after buying about $1b in the last week of January, and about $3b during the month.

Looking at the growth of these high-carry countries reserves doesn’t tell you whether folks were borrowing yen, euros or dollars to buy real, lira and rupees – only that a  lot of money was making its way to Brazil, Turkey and India.   But I would be very surprised if a lot of these positions were not “funded” with borrowed yen.  That is just a hunch – but one that a couple of friends who are in better position to know than I suggest isn’t entirely unfounded.

The growing size of emerging market carry trades may or may not be a proxy for the intra G-10 carry trade. Personally, I suspect it is -- but that is a guess.  However, given the recent data on central bank interevention, I don't think that there is much dobut that a lot of levered money flowed into high carry emerging economies over the past two weeks.

One question.   How long can these countries keep intervening at this pace?  They are all high carry countries, so this kind of intervention costs the central bank money …

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