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KMW Blog Aug 26, 2015: Currency volatility has killed carry trade speculators


Posted: Aug 26, 2015JK: Currency volatility has killed carry trade speculators
Published: Aug 26, 2015Bloomberg: China's Yuan Shock Gives Carry-Trade Crowd Worst Year Since '08
A Bloomberg article laments the death of a lucrative carry trade whose longevity was recently pumped by BlackRock. A carry trade consists of borrowing in a currency where low interest rates prevail and using the proceeds to buy another currency with a stable exchange rate but whose investments offer higher yields. The Chinese peg of its RMB to the USD offered such an opportunity, but the sudden devaluation on August 11 and ensuing bear raid on the RMB has wrecked that carry trade. Part of the market chaos is due to investors trying to unwind their carry trades to avoid losses. The 1994 devaluation of the Mexican peso and the ensuing Orange County bankruptcy is a classic example. Another was the gold carry trade in 1998-2001 where borrowing gold from the central banks and selling it short in amounts greater than production bankrupted some gold producers when the gold downtrend reversed. I suspect that some of the carnage in the metals market was due to metals being part of carry trades that are falling apart. The prevailing view is that a supply glut colliding with a demand sag is behind the weakness in metals, which has negative implications for the next couple years. But it may be the case that the "hard assets" fad where metals were held as a hedge against inflation or "fiat currency debasement", or pledged as collateral for loans to support speculation in the Chinese stock market bubble, are simply shifting from owners who held them as a "financial asset" to end-users who do not need all that metal right away. Once the metal stockpiles have been re-allocated to owners who intend to use them, the weak metal prices will turn around. The Bloomberg article is interesting because it focuses on the RMB carry trade,
 
 

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