Marc Chandler

What's Next for the Carry Trade?

The risk on trade is the market's short hand for buying equities, emerging markets, foreign currencies (not US dollar) commodities, high yielding or spread products.

The safe haven trade would be the opposite. Consider what happened when the Dubai news first broke. Financials got hit. Emerging markets got hit. Gold sold off. Treasuries rallied. The dollar rallied.

Many observers have suggested that gold has rallied as investors lose confidence in paper assets. It is said to be a safe haven. Has no yield. But holds its value, so the argument goes.

Instead, what I am suggesting is that seeing how gold sold off on the Dubai news and then again when the jobs data came out---gold is part of the risk-on trades, momentum, etc, fueled by the liquidity being provided.

To say the samething in a different way--gold's rally and the dollar's sell are correlated but are not in a causal relationship that some assert. They are both correlated to a third factor, liquidity.

Hope this helps.

And to be sure this are just a hypothesis. Our information set is incomplete, but it is my best guess based on my limited information set.

Why China's New Colonialism Should Precipitate a Crisis

In the first 2 qrtrs of 2008, as the USD was going Down the Tube, says Freya: These are the facts: the euro fell 0.09% in H1 09, the Swiss franc fell 2.23% and the yen fell 5.8%. The dollar did sell off against the 4 currencies that were the hardest hit in H2 08, Australian dollar, New Zealand dollar, British pound and the Scandi-bloc.

An appreciation of the CNY iis not tantamount to a dollar devaluation because CNY appreciation says nothing about the euro-dollar exchange rate or the dollar-sterling or the dollar-yen rate.

That said, I tend to believe that the currency is not the key way China competes in the world economy, but rather by cheap labor. Asian Development Bank estimates that Chinese mfg wages are 1/33 of US. CNY doubles and their wages are 1/16 of America's.

It looks to me like the US is one of the few countries that as a declaratory policy says that a strong currency is in its interests. The Swiss don't say that. They intervene to sell their currency. The British, Canadians, Europeans do not say they want a strong currency. Geithner and Bernanke have recently repeated the US mantra. They do not say they want a strengthening dollar, simply a strong dollar. No straw man here please.

Why China's New Colonialism Should Precipitate a Crisis

I don't get it. I present a rational argument that:
1. China got the better of the US in the propaganda battle. It changed the agenda to int'l currency reform and took attention away from it.
3. China's reserves are an embarrassment of riches given how poor the country is.
4. China's policies in LDC is a grab for resources. It will not lead to development of these countries.
5. First the US in decline camp said the euro would replace the dollar. Now it is the yuan. Neither case is true.

I would add, I see no sign that the US is seeking a weaker dollar. Some European finance ministers have expressed concern about the euro's aprpeciation (though it is down year-over-year). The Swiss, with their current account surplus, have intervened to knock its currency down. Canada and the UK have also expressed concern that their currencies' strength could derail the recoveries.

I would also add that as closer readers of Adam Smith could attest, the origins of the wealth of nations does not lie in reserve accumulation but the division of labor and the productivity gains that follow.

I do not understand many of these comments which attack my integrity instead of the arguments. To simply assetr that this is spin and misinformation is not enough. There is a difference between assertions and arguments. I presented an argument that said essentially China is not eating the US lunch. I give numerous reasons. I could learn and others might as well if there was a alternative argument rather than name calling.