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On September 20th, Minneapolis Federal Reserve President Neal Kashkari stated that U.S. inflation remains excessive, with pressures extending beyond the oil price shock caused by the Iran war and spreading to multiple sectors of the economy. The inflation felt daily by Americans is far more than just an oil price issue; it permeates all aspects of the economy. Kashkari indicated that the Fed is increasingly concerned that inflation is not only concentrated in sectors affected by Middle East conflicts or tariffs, but also showing signs of inflation in the service sector. He stated that the Feds responsibility is to bring inflation back to its target level and that it has the tools to achieve this. Kashkari was one of three opponents in the July decision to keep interest rates unchanged, at which time he favored raising rates and warned that waiting too long could lead to entrenched inflation, ultimately requiring more aggressive measures. Kashkari believes that the U.S. economy, despite facing geopolitical conflicts and trade issues, has demonstrated strong resilience, with a robust labor market. He hopes that as some of the conflicts impact gradually fades, economic growth can take over as a driving force, accelerating the cooling of inflation and thus reducing policy pressure on the Fed.On September 20th, Zhipu, a MaaS platform, officially announced that it will soon launch a data content non-retention function to provide stricter data privacy protection for enterprise and developer users. Zhipu stated that this function does not mean that data will not be retained under all circumstances. Functions such as BatchAPI and FileAPI, which require persistent storage of tasks or files on the platform side, are not covered by this function. In cases where retention is required by laws and regulations, or to investigate suspected violations or abuses, the platform may retain relevant data for 30 days or more as required.Iranian President Peshizian: We welcome any dialogue that can bring lasting security and peace, and in this process we need to have common goals.September 20 - According to a report by Fox News on the 20th, US President Trump stated in a telephone interview that the US has been in communication with the Houthi rebels in Yemen, and the Houthis have agreed not to engage in war with the US.On September 20th, according to the Financial Times, Wall Street banks predict that the US will borrow approximately $1 trillion in short-term Treasury bonds over the next year to meet growing government financing needs. Bank of America projects that in the new fiscal year ending September 2027, the US will borrow approximately $1.07 trillion, excluding debt maturities; JPMorgan Chase projects approximately $1.09 trillion in short-term Treasury bond issuance in 2027, and Goldman Sachs projects $961 billion. This increase in short-term debt issuance comes as long-term borrowing costs in the US have risen to their highest level since 2007, prompting Treasury Secretary Scott Bessant to seek to lower long-term interest rates by expanding repurchase agreements for 10- to 30-year Treasury bonds. Bank of America projects that by next September, outstanding short-term Treasury bonds will rise to approximately $8 trillion, representing 24.3% of tradable Treasury bonds; Goldman Sachs projects this ratio to be 24.3% next year and rising to 24.9% in 2028. This level is close to the peak during the pandemic, while the US Treasury Borrowing Advisory Committee previously recommended maintaining a long-term short-term debt ratio of approximately 20%. Analysts say that increasing short-term debt issuance helps lower current financing costs, but it also increases future refinancing risks. Mark Cabana, head of interest rate strategy at Bank of America, said the Treasury is balancing supply and demand in the bond market, but large-scale issuance of short-term debt could lead to "larger and more volatile" interest payments. Meanwhile, the Federal Reserve has purchased a large amount of short-term Treasury bonds this year, and the approximately $8 trillion in assets in money market funds also provides demand support for short-term debt.

How to Trade Using the Carry Trade Strategy?

Charlie Brooks

Mar 25, 2022 09:36

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Carry trade is the borrowing or selling of a low-interest-rate financial instrument in order to acquire another with a higher interest rate. The trades will either be short on the lower interest rate currency or long on the higher interest rate currency, with carry trades needing to be maintained for a lengthy period of time utilizing leverage to maximize profits and take advantage of interest rate spreads between the two currencies.


The use of leverage with a broker to increase earnings multiples through interest rate arbitrage is considered a 'risk on' strategy, in which investors consider the current economic environment to be positive for their position or, more importantly, the economic outlook to be positive, supporting an interest rate diverging environment that enhances carry trade returns. The approach is based on an assessment of each country's or financial zone's economic status.

How to Trade the Carry Trade with Risk Aversion?

The carry trade has been a particularly popular medium to long-term strategy in the FX sector, with interest rate changes being minimal and the ability to take long-term positions appealing to investors and hedge funds.

Carry trade is essentially all about interest rate differentials and, more significantly, interest rate forecast.


However, care should be used by ordinary investors. While in an ideal world, when political stability is maintained and macroeconomic circumstances are favorable for carry trades, transitioning from a low yielding to a high yielding environment is not always that straightforward.


Economic shocks will be reflected in the forex market, often much faster than in other asset classes.


Furthermore, although central banks have a propensity to give direction for financial markets, ostensibly allowing adequate time to react and position in anticipation of a policy move, certain central banks are less interested in sending instructions than others. A sudden policy adjustment by a central bank has the potential to erode any gains gained via a carry trade on a particular day and potentially result in substantial losses.


Natural catastrophes or conflict may also cause risk aversion, rather than merely a change in policy stance.


In summary, the following are the primary risks associated with carry trade positions:


  • Geopolitical risk — A political event that affects attitude toward monetary policy and the economic outlook of a certain nation, such as Brexit, sanctions, trade wars, and so on.

  • FX risk — gains from interest rate differentials negated by exchange rate changes in the carry trade, resulting in losses despite favorable interest rate differentials.

  • Gearing risk — Losses caused by unanticipated movements exacerbated by leveraged positions, which might result in margin calls or even positions being stopped out by an exchange.

  • Interest Rate Risk - This becomes more of a risk when compounding interest is included in. Movements in interest rate differentials may have an influence on returns in either a positive or negative way, with a narrowing of differentials resulting in lower-than-expected returns until the next interest compounding period.


Nonetheless, although risk aversion might be a problem for carry trade positions, carry trades can be a wise long-term investment or a trigger to buy/sell any asset.


The most conventional carry trades have been the USD/JPY, NZD/USD, NZD/JPY, AUD/USD, and AUD/JPY, with the EUR/USD emerging as a viable option since the global financial crisis. There are others, such as the Brazilian real and the Turkish Lira, as well as other more volatile exotics, but risk appetite will need to be especially strong, and with some countries less transparent than others, carrying trades into such exotic currencies carries substantial risk. Although these combinations are the most common for carry trades, any currency or currency pair may be deemed a carry trade transaction.


The difference in interest rates between two nations may be the primary driver of one currency's strength over another.


With interest rates at or below 0%, the EUR and Japanese Yen are among the favored financing currencies in today's interest rate environment.


Looking at recent swings in 10-year US Treasury rates, the major shift in attitude towards the US economy and monetary policy outlook has seen the Dollar surge of late, with year-to-date losses all but erased in only a few weeks.


Finding the correct trading platform with the necessary trading tools is critical for individuals wishing to engage in carry trades. HQBroker is one such platform that allows traders to trade FX and CFDs, allowing them to scalp, swing, or take on longer-term positions such as carry trades while leveraging their profits.


Every trader must investigate and comprehend the relevance of carry trades both before and after making a deal. Carry trades and interest rate differentials generate volatility in the FX market, as well as the possibility for a trader to execute a carry trade with a high probability of a positive return.

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