All banks are simultaneously experiencing this phenomenon, so they will all have to compete to shore up their balance sheets. Why would I bank with my bank intermediation, personnel experience. In short the banks who are the most transparent will attract clients. Large write off's are on the horizon especially as the credit crunch progresses, and the only thing that will keep depositors at a bank is trust. What better way to gain trust than be transparent. All the big banks have had write offs and the one that’s mum healthy or not will be the next Northern Rock.

Yeah, interest rate expectations are going to be one of two primary considerations for the carry trade over the next few weeks - that and fears over the health of the financial markets.

Though it is just analyst remarks (and analysts can't influence the market for long under most situations), there are a number of warnings being issued over the health of the markets. Goldman says US firms need to raise another $65 billion to compensate for ongoing write downs; John Paulson (manager of fund Paulson & Co. who profited from the subprime meltdown) says global writedowns are only a third of the way through the $1.3 trillion total; and RBS is very pessimistic with a market crash forecast by September.

And, though interest expectations have improved in favor of the carry recently (with the outlook for Fed cuts throttling back), they are still heading out of favor of high yield differentials. The dollar is a funding currency, but the FOMC is looking at hiking - the market thinks multiple times. The franc is still holding a hawkish tinge; but the yen is steady were it is. On the opposite side of the trade, the RBNZ has cleared the way for rate cuts, the RBA has made it clear they won't do anything for the rest of the year (probably meaning they will be going to cuts next) and even the chance at a BoE hike has been pulled back with wait-and-see commentary by the MPC.

We should get some interesting action from the carry over the next month or so. Direction, however, will probably take longer to discern.

I just read that the Volatility Index (VXI) is one of the best indicators for the carry trade, is this true? I believe so because the carry trade works when volatility is low and when the VXI goes out of wack, then the carry is dangerous. The volatility index is traded on the CBOE. This invester fear gauge should be a great way to predict whether the carry is profitable or not.

Yes, the volatility index is a good indicator for the carry trade because carry trades thrive in low volatility environments. That is why we created and include a derivation of the VIX in our weekly carry trade report

http://www.dailyfx.com/story/trading...977042241.html

I updated the carry trade report this week; and the condition indicators are giving interesting readings - especially after Thursday's massive selloff in equities, rise in default swaps and rally in commodities. Ultimately, the carry was only moderately impacted - probably because so many yen and swiss crosses are still near the highs of recent rallies.

As for the VIX, it is a good gauge for overall risk in the financial markets. However, it was specifically for the equities market; so using it for currencies would thereby need to rely on the carry/equities correlation. To make a more FX specific, we actually created our own volatility index (we dubbed it the DailyFX VIX - original, huh?) based on implied volatility in currency options. We have already applied it to a lot of research and have found that it is a good indicator for the market.

Where can I find the daily fx volatility index, you mentioned it and can you go into detail as to what it consists of. Thanks

There you go.

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Here is another issue that could force a carry unwinding.

A story from Bloomberg.com reported that there is no Junk Bond market in Europe anymore. While this would be good for the future as there will be a lower probability of significant levels of default, it will also cool growth as many lenders aren't able to access funds. What's more, as the market shrinks, there is less interest and therefore less liquidity for the existing issues - making another crunch a much greater threat.

There are a number of problems lining up for the world's credit markets that could catalyze the next credit crunch (and perhaps a financial crisis). Anyone think this will be an issue? What is the breaking point going to be?

Hi.
What do you mean about ISK, SEK, NOK, ZAR, HUF, SGD and HKD pairs to use it in carry trade?
Thanks.

Hi John,
I am new to this forum and have enjoyed your very insightful columns... Now on your variation of the VIX - back when I was trading options on equities.. We used to remember it as: When the VIX is High - it's time to Buy and when the VIX is low - It's time to go...!! Would that be a similar situation with your VIX or opposite. Thanks in advance.. - A.J.

These pairs all have potential for a carry trade because of their rates. However, many of them are volatile and/or they are managed by policy groups (and could therefore are frequently manipulated, which may lead to considerable capital losses).

Personally, I would stay away specifically from the Singapore dollar and the Hong Kong dollar because both currencies frequently see sharp fluctuations from unexpected intervention from their monetary policy authority groups (and I have heard of at least one good trader's sizable account being wiped out on such an event).

The other currencies can be integrated into a carry strategy but a few of them (ZAR, HUF) can produce serious volatility; so it is best to make a basket of these pairs with more cautious ones. I would also underweight those pairs specifically because they have high yields and high volatility and overweight those that are more stable.

The trading concepts will be the same between the two markets, but how you use it is dependent on your trading style.

I actually used to trade options on equities and indices and used the extreme volatility readings as a contrarian gauge - so a VIX (or other relevant implied volatility reading for that asset) reading within the top 15% of the past year's action would encourage me to sell options spreads. On the other hand, a reading within the bottom 10% of volatility would lead me to buy spreads or naked options for big jumps in delta and gamma.

This can be adapted into spot currency by using the extreme low volatility readings as a means for predicting breakouts and extreme high readings as a guide towards trends or consolidation.

Of course, you can use this as an indicator that doesn't fight the trend. If you aren't at extremes, rising volatility may encourage you back into the market for more trading opportunities. Or, a falling VIX may signal a lack of activity ahead and fading options for swing or day trading.

Another way to use the DailyFX VIX (which is how we use here on the research desk) is to apply the volatility reading as a filter for what type of market conditions to expect and therefore what style we should be trading. Carry and range based systems will do poorly when volatility is high. On the other hand, the trends and breakouts will do well under such conditions.

Thanks.
Please see my jpg file.
What do you mean about this chart?
How can i use this data at carry trade?

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This graph would have a very indirect influence on your carry trade picks.

The current account deficit as a percentage of GDP is often used as a measure of overall economic health; but in my opinion it is difficult to judge just how well it does that job because some economies are more dependent on trade than others.

What's more, growth trends are lagging and take a long time to develop. Therefore, using them for interest rate expectations (the primary driver for currency direction and carry returns) is less useful for anything less than the long-term.

I would use interest rate expectations measured through swaps, Libor rates, short-term government debt and compare them between countries to guide my outlook for yield differentials and the direction of exchange rates. But even after you establish this, you need to find a measure that tells you whether carry is a safe strategy (just think about what happen to it after the subprime meltdown last summer). I typically use a volatility measure for that purpose (the DailyFX Volatility Index).

Thanks.
Sorry for my english. I'm russian trader.
Russian's (like chinese and another asia's people) trade only speculative.
And about "Carry trade" information not enough at russian language.
Please tell me about "the DailyFX Volatility Index"?
How can i use it? And what this index show me?