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Carry Trade Unwinding Hell Continues

Interest-Rates / Yen Carry Trade Sep 11, 2008 - 12:53 PM GMT

By: Mike_Shedlock

Interest-Rates Best Financial Markets Analysis ArticleThe Central Bank of New Zealand Cut Benchmark Lending Rate 50 Basis Points and announced "We have room to move".
New Zealand's central bank cut its benchmark interest rate by a half point to 7.5 percent, more than forecast by most economists, saying the economy is in a recession and inflation will slow.

The nation's currency dropped to a 22-month low, and bond yields fell after the decision. "We've got room to move, "Reserve Bank Governor Alan Bollard said in an interview from Wellington today "We're in a loosening mode."



Bollard, 57, said the economy is in its first recession since 1998 as the jobless rate rises, housing slumps, retail sales drop and a drought cuts farm exports. The New Zealand dollar, a favorite of the so-called carry trade, has dived 13 percent since July 24, when Bollard cut the benchmark for the first time in five years from a record.

New Zealand's dollar fell to as low as 64.95 U.S. cents from 66.26 cents immediately before the decision. That's the lowest since Oct. 2, 2006. It traded at 65.15 cents at 5:10 p.m. in Wellington. The three-year bond yield fell 19 basis points to 5.72 percent.

Retail sales fell by the most in at least 13 years in the second quarter as consumer confidence slumped and record-high gasoline prices left households with little to spend on discretionary goods.

House sales fell to a 16-year low in June and residential construction dropped for three consecutive quarters.

The jobless rate rose to a two-year high in the second quarter.

The Reserve Bank of Australia this month lowered its benchmark interest rate for the first time in seven years as economic growth weakens. Governor Glenn Stevens said this week it may be six months before inflation eases.

Carry Trade Hell

In spite of what the ECB says about inflation, expect it to start cutting rates just as New Zealand and Australia did. Such action will further support the carry trade route. It's only a matter of time before the ECB cuts rates and Europe will be fully entrenched in a recession when they do.

Dollar Rises to One-Year High Against Euro

Bloomberg is reporting Dollar Rises to One-Year High Against Euro on Growth Outlook
Sept. 11 (Bloomberg) -- The dollar rose to the highest level in a year against the euro on speculation that economic growth in Europe will be slower than in the U.S., prompting the region's central bank to lower interest rates.

The U.S. currency climbed for a second day as traders raised bets that the European Central Bank will cut borrowing costs before a government report tomorrow likely to show industrial production in the euro area shrank. New Zealand's dollar dropped to its lowest level since October 2006 after Alan Bollard, governor of the nation's central bank, reduced interest rates by more than economists expected.

"We've got this dollar strength for several weeks now that is driving currency markets and the fundamental picture is underpinning this," said Lutz Karpowitz, a currency strategist in Frankfurt at Commerzbank AG, Germany's second-biggest lender. "The euro-zone economy is going into recession. This is a growth-differential story."

Fundamental Picture Is Underpinning The Dollar

Let's emphasize that last paragraph because it is something commodity bulls simply fail to see.

"We've got this dollar strength for several weeks now that is driving currency markets and the fundamental picture is underpinning this," said Lutz Karpowitz, a currency strategist in Frankfurt at Commerzbank AG, Germany's second-biggest lender. "The euro-zone economy is going into recession. This is a growth-differential story."

Technical Nonsense

ECB's Wellink Says Too Soon to Say Slower Growth to Damp Prices
European Central Bank Governing Council member Nout Wellink said it's too soon to conclude that a possible recession in the euro region will damp inflation.

"I think you can't rule out a technical recession, but I think we concentrate too much on precise GDP figures," Wellink told reporters in Nice, France today. Asked if slower growth would bring down inflation, he said "it's too early to draw conclusions on this." Talk of a "technical recession" is technically nonsense just as the talk of the US not being in a recession (also based on GDP) is technically nonsense.


Note: Bloomberg has changed the above link. The text and comments are accurate as is the headline. The original article is gone.

Japan In Recession

In Japan Machine Orders Fall 3.9%, Second Monthly Drop .
Sept. 11 (Bloomberg) -- Japanese machinery orders fell for a second month in July, signaling manufacturers expect the global slowdown to crimp demand into next year.

Orders, an indicator of capital spending in the next three to six months, declined 3.9 percent from June, when they slid 2.6 percent, the Cabinet Office said today in Tokyo.

Japan's economy probably shrank last quarter more than initially estimated as business spending fell, the government is expected to report tomorrow. Slowdowns in the U.S. and Europe have taken a toll on Japanese exports, the engine that drove growth over the past six years, while stagnating wages and the worst inflation in a decade have subdued consumer spending.

Rupee Falls to 2-year Low

In India the Rupee Falls to 2-year Low as Dollar Gains Spur Importer Demand .
India's rupee fell to the lowest level in almost two years on speculation investors and importers stepped up purchases of the U.S. currency as the dollar rallied against the euro to the highest in a year.

The rupee dropped the most in more than three weeks, sliding in tandem with eight other most-active Asian currencies outside Japan, on concern widening credit-market losses will slow economic growth. India's benchmark stock index has slumped 29.4 percent this year, heading for the first annual loss since 2001, as overseas funds dumped $7.4 billion more local equities than they bought.

"Importers with short-term liabilities are covering aggressively at a time when dollar supply is very limited," said Parthasarathi Mukherjee, treasurer at Axis Bank Ltd. in Mumbai. "The sentiment for the dollar is strengthening globally and that is adding to the momentum against the rupee."

The U.S. dollar has advanced against all of the 16 major currencies tracked by Bloomberg in the past three months as commodities declined. The ICE's Dollar Index, measuring the greenback against the currencies of six U.S. trading partners, touched 80.375 today, the highest since September 2007.

Crude oil in New York has dropped almost 30 percent from an all-time high of $147.27 a barrel reached on July 11. The UBS Bloomberg Constant Maturity Commodity Index of 26 raw materials has declined 22 percent from a July peak.

The European Commission cut its growth outlook for the 15- nation euro area for the rest of this year, predicting a recession for Germany, the region's largest economy. The U.K. economy is contracting for the first time in at least a decade and will go through a recession this year, two reports showed yesterday.

Expect the Carry Trade To Continue To Unwind

The unwinding of the carry trade is US dollar favorable and commodity unfriendly. That carry trade unwinding has a long way to go.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2008 Mike Shedlock, All Rights Reserved

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Comments

Ken Lee
11 Sep 08, 21:14
US Dollar Suckers

So, the U.S is not in recession or is in a less severe recession than the rest of the losers? What was the inflation figure used in the revised 2Q08 GDP figure again? 1.2%? From which marvellous land do we get 1.2% "inflation" anywhere in the world today? I want to be there too. How abouts the nice fat deficit of $400+bn. That chump change? 117 or more likely bank failures, how well is FDIC capitalised to handle these. Say what have the Saudis been doing with their petro-$$ of late. What about the xx trillion of derivatives floating around the financial system, a lot of it in the U.S? Good fundamentals?

No I stick my neck out and say those seeking "safety" in USD are brainless entities simply running with the herd, rushing about wherever that's hot (yes including the recent commodities bull). And such behaviour can last awhile, so... This generation of investors is hands down the most easily suckered.


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