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How Far Do the Yen, Euro and Dollar Crosses Run on Carry Tides?

How Far Do the Yen, Euro and Dollar Crosses Run on Carry Tides?

2016-02-23 01:15:00
John Kicklighter, Chief Currency Strategist
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Talking Points:

• Risk aversion has kicked in, but Yen crosses in carry trade have been slow to fold to the pressure

• The Euro, Pound and Dollar have all taken relatively unfamiliar carry trade positions

• We look at the 'risk-reward' in some well-worn and relatively new popular carry trade pairs

See how retail traders are positioning in the majors on DailyFX or bring the figures to your charts using the FXCM SSI snapshot.

Risk aversion may not yet be a self-sustaining spiral, but the makings of a deeper deleveraging are evident. That said, a range of assets have seen significant depreciation already, while others have held resilient for some time. In the FX market, the Yen crosses - traditional fuel for carry trade speculation - have shown strong lag to more volatile and yield-intensive assets like high-yield and emerging market benchmarks. Meanwhile, the Euro has taken on the unusual role of a 'funding' currency to this same theme. These distortions are the result of competitive monetary policy which is more pronounced in FX markets. When will these buffers be overrun by speculative necessity? That will be determined in large part by the intensity of risk aversion and the expected capabilities of the world's central banks. Yet, no other measure will be more important than the level of exposure the speculative ranks hold to this increasingly risky position. While we can't measure it directly, we assess the FX carry's capacity and tipping point via its risk-reward in today's Strategy Video.

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