UPDATE:
Mosaic of the Mind asked:
Why would there be such a reversal while the American markets have "rallied"?My response (I'd love feedback):
When markets sold off / dollar rallied in Sept-Nov it was due in large part to levered investors (ie. hedge funds) that were forced to sell off their positions. The dollar has been used as a carry trade (investors borrowed cheaply in dollars then exchanged these dollars for the local currency of their investment).Get ready for additional waves / volatility as leverage continues to work its way through the system.
One example is Russia, where many investors borrowed in dollars, exchanged for Rubles (hence Rubles had rallied) and invested in Russia. Then from Sept-Nov, ~$100 billion in "hot money" was pulled and these investors closed their dollars / ruble positions to close their dollar borrowings (Russia may actually be a bad example as their dependence on oil is causing magnificent problems now... but ignore them for this thought experiment).
One can assume that the majority of this unwind ended ~Nov. 20th (though I think this is just the first wave). Now that these trades are unwound and equity markets have rallied, there is no longer the need or demand to buy dollars to close such trades. Thus, the dollar has sold off after being overbought due to:
- The end of this unwind
- The incredibly low interest rates, which will likely stimulate another wave of carry trades
Click chart for larger image:
Source: Investment Postcards
Do you have a chart of when these reversals occurred? Besides the continued unwind of the carry trade and the recent rate cuts, why would there be such a reversal while the American markets have "rallied"?
ReplyDeleteMoaM-
ReplyDeleteThis is since November 20th, just about when equity markets rallied.
The reason:
When markets sold off / dollar rallied in Sept-Nov it was due in large part to levered investors (ie. hedge funds) that were forced to sell off their positions. The dollar has been used as a carry trade (investors borrowed cheaply in dollars then exchanged these dollars for the local currency of their investment).
One example is Russia, where many investors borrowed in dollars, exchanged for Rubles (hence Rubles had rallied) and invested in Russia. Then from Sept-Nov, ~$100 billion in "hot money" was pulled and these investors closed their dollars / ruble positions to close their dollar borrowings.
One can assume that the majority of this unwind ended ~Nov. 20th (though I think this is just the first wave). Now that these trades are unwound and equity markets have rallied, there is no longer the need or demand to buy dollars to close such trades (and those trades were probably overdone). Thus, the dollar has moved back after being overbought due to the end of this unwind / the incredibly low interest rates which will likely stimulate another wave of carry trades.
Thoughts?
I was looking to see if you had any more specific (daily iterations) information that could possibly signal from whom these movements have come and when simply to compare market reactions. I am always somewhat skeptical of currency market movements, especially the origination of new trends. It only takes a little to move the markets in a way that investors pick up and run with.
ReplyDelete