Quote:
Originally Posted by Freefox
John,
Very interesting to see what has happened with the AUD/CHF pair since your last reply to my questions. On 23rd September it was trading at 0.91 and now it's touched 0.73; a 20% depreciation in 2 weeks!! Historically has there been any move has big as this in such a short period of time and can it really continue downwards at such a rate?
You mentioned, that "price adjusts on rate expectations .. (unless there is a surprise)". Well we got the surprise earlier in the week when RBA surprised the market and agressively cut interest rates by 1%.
This 1% cut must be a factor in the continueing decline of AUD/CHF but are we also witnessing here the "death of the carry trade" in general?
Due to the financial turbulence across the world and the deleveraging of assets are people moving out of high risk assets/strategies? There is talk of coordinated interest rate cuts across the markets which may give the AUD/CHF, and others a large reactionary bounce. Will these be enough to stabilise the markets and lead to more of an appetite for risk and thus give life back to the carry trade or can we say that 2008 has seen the end of the carry trade?
Interested in yours and anybody elses views on this?
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Hello Freefox,
There have been record breaking moves in a number of pairs - and most of them have involved either the Japanese yen, Australian dollar or New Zealand dollar.
The RBA's decision to cut rates by a massive 100 basis points certainly had a hand in the AUDCHF's decline, but from the reaction to the rate decision in AUDUSD, you can see that the market was largely pricing in a large rate cut ahead of time. Instead, you are looking at the suffering of a carry trade pair that has one of the highest returns (and thereby the greatest risk). The meteoric rise in fear over the past few days has more to do with this pair's decline, though a cut to the possible returns of a carry trade play a party in its appeal.
As you can probably see by now, the coordinated rate cut certainly didn't lead to an instant rebound in confidence (we could see it return slowly). On one level this may help to insure the global policy makers are ready to make the effort to stabilize the market, but it also suggests they think things are bad enough that such a move is necessary. What's more, from a carry stand point, the general returns from yield differential took a big hit with this coordinated rate cut; and when the strategy hangs on a delicate balance of perceived risk and potential returns, a drop in yield clearly tips the scales.
