Thursday, September 11, 2008

Carry- the darling of the FX markets is a loser down under

The central bank of New Zealand just cut interest rates for the second time in two months. This 50 bp cut follows the 25 bp cut in July. The concern is not about inflation but a sustained contraction in the economy and shows the impact of the business cycle on driving rates and currencies over the last few months.

New Zealand was the darling of carry traders for years, but it is a new world with the growth cycle taking the lead in currency decisions. Now this was not completely unexpected given there has been talk about recession for months, but the swift decline in the economy called for aggressive easing and with that we saw a currency decline. This was not a problem during much of the last five years when growth around the world was fairly steady, but there is a switch in the behavior of the markets to focus on these bigger swings in the business cycle.

While the decline in growth has not been as dramatic, similar behavior is occurring in Australia where there is expected to be a slowdown in growth as the commodity cycle turns and other countries feel a slowdown. The Reserve Bank of Australia cut interest rates to 7 percent his month.

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