Carry Trade: The World Currencies Profitable to Invest

Carry Trade: coins more profitable to invest August 23, 2009 Investors are back in charge. Like a vice, high levels of profitability have been enjoying for a long period before the crisis that has left them gustito who want to savor. Reasonable return is not enough. Nor is spared the harmful consequences on the economies produce irrational behavior they observe. After a long hibernation, are seeing the first glimmers of economic recovery and when they realize that this is land they walk, they begin to run again this race for higher profits. In this context of slight recovery, investors as unwitting allies to central banks in several cases have warned about the maintenance of minimum levels of interest rates by at least a few months. Speculative activity, very strong in recent times has shown finishing in the modern world there is room to arbitrate. The carry trade, which virtually disappeared in the midst of economic turmoil, is the way chosen by investors to return to hefty profits. The article by Ruben Ramallo for iProfesional on this topic made me think about the inevitability of crisis.

For those unfamiliar with the operation, the carry trade takes advantage of the difference between interest rates in the countries. The aim is to borrow a "hard currency? (Which may be the euro, British pound, Swiss franc, the yen or the dollar), and place that money in a currency that offers a greater return a profit from the interest rate differential. For example, if an investor borrows in yen, since Japan's economy has its interest rates in neutral zone (the benchmark interest rate the Bank of Japan is at 0.1% and Nippon economic problems are expected to continue to be so for a while), and put all your money in the Brazilian economy, where the level of reference interest rate the Central Bank of Brazil is at 9.25%, to reach a margin of gain more than interesting. And it's much more interesting if one considers the typical leverage of these operations (ie, the level of borrowing on capital involved in the operation), the ROI is multiplied.

This situation is currently mainly affecting the Brazilian economy, which, given its monetary policy of inflation targeting are certain limitations to act. And here's another item for speculators: capital flows to Brazil entering the appreciation pressure thus increasing the profitability of investment in their original currency. Thus, the risk of devaluation of the currency in which it invests, which represents a threat to the profit margin, is at a minimum. Chile also is experiencing the action of speculators who use the Chilean peso as currency anchor. Gonzalo Jara, manager of market making Santander Chile, iProfesional: "We have a carry trade phenomenon that plays in favor of the dollar. The large hedge funds use the Chilean peso as currency anchor, because the financing to purchase U.S. currency is to be the cheapest in Latin America?. Somewhat paradoxical that found for Argentina is that it is protected from the threat of carry trade due to the instability and unpredictability of the economy. Yes, it is strange, but I must say I do things so bad, it has its benefits.

Speculators keep away from Argentina and that despite their high interest rates, exchange rate instability, among other things, implies a high risk that they are unwilling to assume. Speculative activity has affected the value of the Brazilian real and Chilean peso. Earlier this year, the dollar was quoted at Brazil R $ 2.313 and $ 638.16 in Chile. Currently, the U.S. currency makes to R $ 1.839 to $ 547.35 in Brazil and Chile. The carry trade is hitting squarely on the competitiveness of these economies, mainly affecting the Chilean economy whose exports account for about 32% of its GDP. The monetary policy of inflation targeting are limitations to this type of operation because it can not intervene in the situation the magnitude required to sustain the exchange rate. Worse, this transaction is being seen both these Latin American currencies as well as with the Australian dollar or South African rand is also replicated in the commodities whose prices have recovered strong so far this year (probably more than necessary) threatening the dynamics of this transaction to generate a new speculative bubble.

What can be said about the regulators? Regulators have not yet aware of how risky the situation. While it does a couple of decades that this transaction is carried out, the risk is involving the generalization of it has a high probability of turning it into a new cause of crisis when we have not come out of the problems caused by the subprime. It strikes me that not enough attention central bankers and policy makers of the leading countries pose a resource for action to halt the resurgence of this transaction so dangerous to the economy. I certainly understand that the very short term benefits of the carry trade can lead to speed recovery of the global economy is paying the silence of policymakers in the major economies. Surely if this results in a new crisis, we find a long line of heads of governments and international organizations with great authority will be encouraged to identify precisely the problem that led to the crisis and regulatory solutions to ensure that no occurring again. By that point, speculators will find another alternative for high-risk investment for the stability of economies and use it against the noses of regulators who choose to look the other way.

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