RT @JoshBBornstein: 65 year study confirms my research: Tax cuts don't lead to economic growth. Ping @Nick_Xenophon , @BCAcomau https://t.…
19/08/2017 9:13 PM
RT @attn: .@Schwarzenegger has a blunt message for Nazis. https://t.co/HAbnejahtl
18/08/2017 9:38 PM
RT @PositiveMoneyUK: Make Monetary Policy Fair: It's time to explore alternatives to 'conventional' QE. https://t.co/m6CFVojm7w #QEforPeopl…
18/08/2017 9:35 PM
@deirdrekent To be expected when income is taxed and capital gain not...
16/08/2017 9:22 PM
@bernardchickey @YourHomeLoanNZ Add ring fencing loses / deal to negative gearing and we might see some balance develop in the economy.
16/08/2017 7:36 PM
@bernardchickey Or take the job and do the right thing anyway - the RBNZ is "independent" after all...
16/08/2017 7:34 PM
@bernardchickey Not take the job because you would know you would be on a hiding to nothing. The link between earn… https://t.co/nxPRuAaT6t
16/08/2017 7:31 PM
RT @theyearofelan: Sure, the cancer was aggressive. But the chemotherapy was also very aggressive. There was aggression on both sides
16/08/2017 7:27 PM
@bernardchickey DTI+LVR+OCR all needed for financial stability & inflation.RBNZ can then push back on dumb policy f… https://t.co/CqXISZUHGq
16/08/2017 7:27 PM
@SelwynPellett Farming capital gains makes it hard to pay current expenses hence the need to externalise costs. Th… https://t.co/J1yevZAHft
14/08/2017 5:46 PM
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4
JUN 10

More on the Carry Trade




When we point to the carry trade as a problem we see claims that there is no correlation in this cross rate or that to interest rate spreads.  Remember correlation is not causation – the theory goes that exchange rates should be correlated and respond to trade flows but there is bugger all of either in that regard, trade is swamped by speculation. Guess who likes that outcome.

I repeat the NZ$ is traded daily at 43% of GNP that is madness from the point of view of the trade exposed economy.

Going to the correlation dicussion the spread at any given time has to be marked against the risk perception – in a happy pre-crisis world a few 100 basis points might be sufficient to ignite the carry, in crisis rife world; troubles here and there might require many hundreds of basis points for the same magnitude of carry. 

But differentials in interest rates fundamentally drive the flow of carry always moderated by risk.  A bit like ohms law, voltage is intermediated by resistance to determine current flow.
 


tags: carry trade, exchange rates, interest rate spreads
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