the carry trade, who pays?

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straight's picture
straight
Status: Silver Member (Offline)
Joined: Aug 25 2008
Posts: 103
the carry trade, who pays?

Hi guys,

I understand how the carry trade works.  it appears that this practice is not open to any investor. 

If a fund borrows US$ at low interest rates and buys A$ at higher interest rates, it pockets the interest spread, then if the original currency depreciates they gain again when they pay back the loan.  in doing this they lower the US$ and raise the A$, its money for jam.  BUT, someone must pay. the money comes from somewhere?  Where?

My guess is it comes from the pockets of US and Aust punters, citizens.  The US citizen pays in lower value of his money, the Australian citizen pays in higher interest rates.  Is this the case?

Why is the practice allowed? it makes the rich richer and the poor poorer.

Straight

Gibber's picture
Gibber
Status: Bronze Member (Offline)
Joined: Oct 4 2008
Posts: 35
Re: the carry trade, who pays?

 

If a fund borrows US$ at low interest rates and buys A$ at higher interest rates, it pockets the interest spread, then if the original currency depreciates they gain again when they pay back the loan.  in doing this they lower the US$ and raise the A$, its money for jam.  BUT, someone must pay. the money comes from somewhere?  Where?

One of the ways New Zealand "Pays" is via loose credit policies.

The NZ banks get a flood of, in relative terms, cheap deposits.  Which they can then lend out for mortgages.

With a fire hose of, up to last year, Yen, and now USD, the amount to lend is huge. And the ability to borrow 100% for your mortgage becomes more and more prevalent.

Those already in the property market let their jaws hit the floor as they see prices going up in their area. First Home Buyers develop a Fear Of Missing Out and get in amongst the 100% mortgages.

As the RBNZ governor dropped the OCR (Overnight Cash Rate) from 8.25 % to 2.5 % from July last year  over a  6 month period, people are now piling back into the housing market. A small 5 to 10 % correction in 2008. All that has been regained and more in Central Auckland where a property frenzy is developing....

Similarly in Australia, the Housing market has had a super stimulus applied...

We are paying via Higher Housing Prices and Increased Debt

straight's picture
straight
Status: Silver Member (Offline)
Joined: Aug 25 2008
Posts: 103
Re: the carry trade, who pays?

Yes Gibber, i hear you. the same is happening in Brisbane.  It cant last.

So the carry trade is, at least in part, paid for by increased household debt. 

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