"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Thursday, March 3, 2011

Remember the Carry Trade

Some of you might remember the Yen Carry Trade which fell completely apart back in mid 2008 when the credit crisis erupted. I might add that it also slaughtered many a hedge fund when it did.

Well - guess what? It's back again. You can see it in play by looking at the Euro-Yen cross. This cross is performing very well today especially given the fact of Trichet's hawkish stance on inflation contrasted with the generally held dovish view of the overall Japanese economy.

The Yen is not nearly as weak as it was back during that time frame as it has been the beneficiary of a large amount of safe haven flows as well as being somewhat regarded as a type of proxy for the Asian region as a whole with players buying it because of Japan's position in the Asian economy which is the region leading the globe in growth right now. But interest rates are still very low in Japan and anytime you get a situation where Central Banks are talking tough on inflation in one place and sound dovish in another, and there is an opportunity to borrow a lot of money very cheaply, the potential for a carry trade exists.

This has been a volatile trade dropping sharply lower when sovereign debt woes surrounding some of the EuroZone nations were in the forefront of traders' minds and rising sharply when they were not. There has also been an element associated with the crude oil rise that has added to the volatile mix.

All in all however, this old cross still is a decent indicator of gauging appetite for risk trades. At one time in the past prior to 2009 one could just about gauge what the price of gold had been doing or was going to do based on the performance of this cross. Both tended to move in unison in the same direction. Gold was then part of the risk trade and when the EuroYen cross was rising, so too was the metal. The opposite held true when the cross was falling; so too did the gold price.

It seems as if this cross is still impacting the price of gold although the relationship has now completely reversed. The cross rises and gold drops lower; the cross falls and gold rises. The relationship is not exact but there is a bit of linkage between the two right now.

What this is telling us is that when the cross moves lower and risk trades are out of favor, gold is moving higher on the safe haven or risk aversion play. When the cross is moving higher and risk is back on the table; gold is moving lower as the safe haven trade fades somewhat.

I think the connection is close enough for the immediate time being to keep monitoring the cross. I want to repeat - it is not nearly as direct as it was back then. It is interesting to note however the ever changing perceptions and psychology of the market and how greatly that has changed from 2-3 years ago when this cross was the be-all and end-all of money flows.

By the way, this is not the only carry trade in operation - the Dollar is also on the receiving end of the carry trades due to its ultra low interest rate environment and widely held view that the Fed is on hold for any interest rate hike in the immediate future.


  1. Hi Dan,

    Just to let you know that I have you linked on my blog.


    Hope you like it!



  2. If that carry trade pattern continues, it seems like a top could be soon.....possibly very bullish for the metals?!

  3. Dan, What is the cross? Please explain. Thanks, HH


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