Moves in carry currencies have matched swings in equity market behavior. As concerns for credit markets have changed, so have the currencies that are represented by the carry trade. The yen has strengthened as carry has unwound only to reverse again once banks were believed to be safe. These swings have not been tied to any significant rate changes but solely a function of perceived risk.
The yen has advanced just under 8 percent only to reverse 3% since Friday. AUD is even more dramatic with a 15.5% decline since month-end and an 8% reversal. The levered or invested currencies are seeing more volatility than the funding currencies but both are being driven less by economics and more by fear. The AUD move has been even more dramatic because of the decline and rebound in commodities. BRL and ZAR both high yielder have followed the same pattern in the last three days.
This is no place for currency decisions based on yield differences. The value of holding currencies is with their ability to be uncorrelated with equities. When correlations increase with traditional assets, their diversification value is diminished.
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