Wall Street Journal Article: Pound Emerges as Possible New 'Carry-Trade' Currency

inspector_monkfish

In effect, Mr. King helped to firm up the possibility that the pound could become the new yen. Just like Japanese interest rates in the early years of this century, U.K. rates clearly have little chance of rising for some time. In another mirror image of the Japanese experience, central-bank asset purchases show no solid sign of coming to an end.

http://online.wsj.com/article/SB125322540936721049.html

Degenerate

I suspect Merv would be quite happy to see this come true.

sabretoothtigger

I thought the same thing, its a better time then maybe ever before for foreign investment.
I dont know about our rates staying low, the difference is japan is self funded and uk must adhere to international money market demands on capital returns, we have to compete with more attractive growth areas and that'll mean interest maybe

PasturesNew

I have absolutely no idea what this even means.

purch

I have absolutely no idea what this even means

Most people don't, but it won't stop a lot of them pontificating about it !!!!

Generali

PasturesNew wrote: »

I have absolutely no idea what this even means.

The carry trade is when you borrow in one currency and then put that money into an interest bearing asset in another. It's a bit like stoozing on a giant, international scale.

The potential problem with it is best shown by example.

Let's say you borrow £1,000,000,000 at 0.6% for a year and use the proceeds to buy a AU$2,000,000,000 1 year Australian Government bond paying 3.55% pa.

However, over the year, the pound rises in value from £1 = AU$2 to £1 = AU$ 2.2.

After 1 year you owe £1,006,000,000 and have AU$2,071,000,000. If the exchange rate hadn't changed you would have been able to exchange that for £1,035,500,000 and walk away with £29,500,000 in profit. However, as the value of the AU$ has fallen to 941,363,636 you have made a loss of about £65,000,000 instead.

Warren Buffet describes the carry trade as being like picking up nickels in front of a steam roller. It's mildly profitable for a while but prone to going very badly wrong.

PasturesNew

Generali wrote: »

The carry trade is when you borrow in one currency and then put that money into an interest bearing asset in another. It's a bit like stoozing on a giant, international scale.

Brilliant.
Understood that.
Ta

purch

I think for any carry trade to work, you need a few 'certainties' which in the current environment are not there.

michaels

The carry trade only 'works' in that you are exchanging return for risk. If you could lock in a profit using forward currency purchases or options then any advantage would be arbed away in an instant. Really it is just taking a position on future currency movements.

sabretoothtigger

purch wrote: »

Most people don't, but it won't stop a lot of them pontificating about it !!!!

Ive never carried anything more then a suitcase between countries and that was on wheels

I do think foreign investment is subject to currency risk so that makes me an interested party.
Right now I reckon risk is low, are we really going to go from 1.6 to 2 dollars for a pound. That could only be dollar weakness and Im not investing there on purpose anyway

I think the opposite of Generalii's example might happen (long term). I think currency traders use stop loss to cash in before it goes bad ideally because losses can be so great. Really depends how liquid the investment is and yea stoozing fits, stay flexible and it can work

Also many investments will alter in price in line with an exchange rate roughly. Gold in australia should not be that different to the uk, the numbers once passed through an exchange rate should match.
Thats the perfect case and other types like housing will do it less but the effect is still there.
When people say well my house didnt fall in price at all, they probably need to check did the price fall in yen or australian dollars because its likely the world moved while you were sleeping.
Also the big bears might be wrong if they dont include falls in currency imo!

inspector_monkfish

Sterling been whacked down from 1.6520 to 1.6220 over the past 24hrs
largely on the back of the WSJ article

also down to 1.1065 against the Euro