A nice little video here explaining the risk reward calculations of the global carry trade in basic terms. The appearance of an HSBC guy along with book-ended HSBC ads might give you pause about the genesis of the story but it’s still a good snap-shot.
The Australian dollar follows the ebbs and flows of the carry trade so it’s very important. At this stage I assess the risk of a renewed carry trade reversal at 50/50 but they will increase into year end. The video doesn’t mention it but last year’s carry panic was fueled by the double-whammy of the “taper tantrum” and fears about Chinese growth, which hit emerging market growth prospects.
I have few fears about any inflation breakout in the US given its very patchy jobs markets, even if the prospect of mid 2015 rate rises does spook markets moving into year end, but I am of the view that Chinese growth will slow in Q4 as stimulus fades and more into Q1 next year.
Weighing against that are European deflation and boosted QE. And Japan, which could go either way, with more QE or a renewed slowdown.
In short, a repeat of the conditions that triggered the 2013 carry reversal is in the offing, even if they’re likely to be less unknown and therefore less intense.
