The health of the carry trade is dependant on a foundation of high returns (wide yield differentials) and low volatility (or perceived risk). Considering the outlook for global interest rates has plunged over the past weeks and broad fears are growing out of a global slowdown in growth and lingering threats to the financial system, it makes sense that the carry trade has tumbled recently.
Carry trade has a successful track record that goes back more than 25 years. However, a massive shift in today's complex financial markets towards risk aversion is not only questioning the logic of this type of absolute return strategies but also threatening the survival of many carry traders.
The dollar continues to gain but the USDJPY break below a supporting trendline suggests a bigger bear move for the pair.
The US dollar has pulled back across the majors as US non-farm payrolls fell more than expected in August by 84,000, marking the eighth consecutive month of contraction in US job growth. Perhaps even worse than that, the unemployment rate surprisingly rocketed to a nearly 5-year high of 6.1 percent from 5.7 percent.
Currency Strategist
With the usual return of liquidity and volatility after the US Labor Day holiday, speculation over the timing and severity of the Federal Reserve’s next monetary policy shift has moved back into the forefront. However, the market’s outlook for rate hikes certainly isn’t supporting a strong dollar in the near-term.