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Goldman On The Dollar Carry Trade: "A 20% Reversal In Either 3 Months Or 3 Days"
As the decoupling between cause and effect continues: i.e., the economy and the stock market, more and more pundits focus on the dollar carry trade as the primary culprit for market appreciation. With the US market flat for the year when indexed for the decline in the dollar, the entire rally has been one big window dressing to prop up Obama's confidence boosting propaganda. Yet the entire rally, aside from the unique technical peculiarities underpinning it (short squeeze, low volume/high momentum algo participation) has been carried on the back of the dollar's decline: take away the concept of importing inflation at all costs (which is what Bernanke is happy to continue doing) and US deflation would have been rampant by now, proving the Fed's plan to liquefy the capital markets to be a disaster. As such, the only thing that allows the "rally" to continue, is the willingness of the Rest of the World to fund not only the skyrocketing US budget deficit, but the Chinese trade imbalance, courtesy of the yuan-dollar peg.
The rally will come to an abrupt end when one of two things happens: i) the Fed gives an indication it wants investors to stop chasing risky assets (likely not for at least 5 years) and ii) the rest of the world realizes that America has no leverage whatsoever, with its crumbling economy, and its loose monetary policy which as prominent Chinese figures have already determined, is currently causing asset bubbles worldwide (yet which the Chairman is unable to see). Possibility ii has a much greater probability of occurring, yet if and when it does, will be dependent in great extent on the future of the dollar carry trade.
Nouriel Roubini has already pointed out the great danger posed by every single trader in the world being short the dollar. As we saw on Monday, one word out of place by Bernanke, and the reversal will be disastrous. Below we present the thoughts from Goldman Sachs, which, as expected, is much more sanguine about the impact and the participation in the carry trade. To Goldman, the dollar value is merely a function of the US economy's weakness. Ironically, Goldman has been pumping up the strong economy story for much of H2, until recently when even 85 Broad has reversed its opinion. While Goldman's observations are not surprising, the question emerges as to how the firm is positioned now to make the higher amount of money from a macro picture, as very few trade on company-specific alpha: courtesy of banks like Goldman, every asset class has become one big beta bucket.
If Goldman is wrong, which it likely is in this case, the impact would be rapid and dramatic: as Goldman itself notes: a 20% reversal which would come in either 3 months or 3 days. Let's recall Goldman's stance on oil last summer to see just how spectacularly wrong the world's most riskless hedge fund can be in its "policy" guidelines.
Factors Driving Dollar Weakness besides Dollar-Funded Carry Trades
There has been a lot of focus recently on the extent of Dollar-funded carry trades contributing to the decline in the USD. The IMF in a report prepared for the recently concluded G-20 Finance minister’s meeting cited ‘In addition to foreign funds moving into emerging market equities, led by expectations of higher growth, there are indications that the U.S. dollar is now serving as the funding currency for carry trades. These trades may be contributing to upward pressure on the Euro and some emerging economy currencies.’ We find the argument of Euro benefiting from this particular dynamic somewhat challenging though, given the minute rate differentials here. But overall, there are carry trades funded in USD and other commentators have expressed their worries over a new ‘carry bubble’ emerging. While pinning down precisely the extent to which speculative Dollar funded carry trades are taking place is not an easy task, we can point to a few other factors behind Dollar weakness so far this year. Simply put, the Dollar's decline so far does not seem too out of line, especially when you consider that the US is still cyclically one of the weakest economies around.
While there has been a pick-up in investment in higher yielding currencies and assets, there is a distinction to be made between speculative carry trades and investments made on the basis of stronger EM fundamentals. It is hard to draw the line where investment activity becomes a speculative bubble but we do not think that we are in the midst of a 'carry bubble' at the moment. Yes, inflows into EM assets have accelerated rapidly over the last several months but this has also arguably been led by improving fundamentals in these countries in general. US equity fund flows into EM markets have broadly tracked the widening growth gap between EM countries and the US. We use a simple measure of real GDP growth in EM countries minus US growth to track the latter, which shows that the EM-US growth differential had peaked in 3Q of 2008, bottomed in 1Q 2009 and has since widened out again over the last 2 quarters . Plotting this EM-US GDP differential versus US equity fund inflows into EMs, there does not seem to be any significant divergence. The point being that EM equity flows so far have been underpinned to a certain extent by relatively stronger recovery prospects.
Other factors underpinning Dollar weakness include hedging asymmetries. We have most recently discussed this in our latest November FX monthly publication. In a nutshell, this refers to the likelihood that overseas investors in US assets appear to be FX hedged to a greater degree than US investors of foreign assets. As a result, a rally in risky assets tends to result in Dollar selling to maintain hedge ratios.
Finally, part of the Dollar weakness trend observed so far since the crisis has also been due to the ongoing normalization in markets. This has been well described in a recent speech by Chairman Bernanke: ‘When financial stresses were most pronounced, a flight to the deepest and most liquid capital markets resulted in a marked increase in the dollar. More recently, as financial market functioning has improved and global economic activity has stabilized, these safe haven flows have abated, and the dollar has accordingly retraced its gains.’ Indeed, our GS USD broad TWI has retraced to a large extent but even now is still slightly stronger than the levels of autumn last year.
USD-funded Carry Bubble vs Bubbles from Importing US Monetary Policy
Thus while there are Dollar-funded carry trades and certainly other cyclical factors behind the Dollar’s weakness, we do not think we are seeing a speculative ‘carry bubble’ for now. The difference being a 20% strengthening in the Dollar upon a reversal, over say 3 months as opposed to 3 days for the latter.
There is also a difference between a Dollar-funded carry bubble and asset price bubbles from importing loose US monetary policy. There is certainly a case to be made of certain parts of the world currently experiencing rapid asset price inflation, as a consequence of the accommodative monetary policy of the US. Hong Kong comes to mind, importing the low US interest rate policy with its currency peg, despite having a different economic backdrop and real exchange rate appreciation pressures. Domestic asset price inflation is thus one of the release valves in such an instance, while maintaining an undervalued nominal currency. Same goes for Singapore with its managed exchange rate basket and imported low nominal interest rates. But this is largely a consequence of the adopted exchange rate regimes of these countries, where one way to ease asset price inflation would be to allow more domestic nominal currency appreciation.
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I hate agreeing with the vampire squids but yes of course its crowded, and yes everyone knows it, and yes everyone believes they are not part of the bell curve and won't get trounced when the ship that everyone is on the same side of capsizes.
Of course Goldman, with their 98.3% winning percentage will know within hours of when the dollar funeral has to see a counter trend, and know if its "3 days or 3 months" - they are only offering a guess to be rhetorical.
Until then, party on garth.
If you look at the DXY and S&P the S&P has gone up roughly 2% for every 1% drop in the USD. So if the DXY goes up 20%???
Back to 666,... but Ben will cut it short before that!
which comes first, Chicken or the egg. I really doesn't matter because each are very closely "related" ;)
which comes first, Chicken or the egg. I really doesn't matter because each are very closely "related" ;)
2 videos from Marc Faber
#1 as long as Ben Bernanke is fed chief, gold will be a good investment
#2 gold will never fall below $1000 again
http://www.fundmymutualfund.com/2009/11/marc-faber-as-long-as-ben-bernan...
Faber believes we will not see lows of early 2009 because if the market falls to 900, Ben will print more... if we hit 800 he will go ballistic printing.
I admit he is a fun watch even if sometimes gets all flamboyant in his predictions. They are rooted in reality, unfortunately.
No offense, but Faber also said gold would drop to $800 before continuing not a week before that forecast.
Technically he said it could, he said to watch for a break through support at ~1000 (IIRC) and if that didn't hold then it could pull back to 800. A week later he obviously felt that because it didn't break through support that it had established a new floor.
which I noted in the piece
hey we are all momentum traders ala Jim Cramer now
stock is up, we're bullish
stock is down, we're bearish
Maybe Faber caught an episode of Mad Money?
Sorry ... I am always da Bear ... Oh! Oh! ... I gotta go now and cover
I think Faber is wrong. The forces that will move the market down are now far too strong for Bernanke to counter. He cannot keep printing dollars like there is no tomorrow because he will induce a runaway flood AWAY from the dollar, which will result in hyperinflation, and will not be susceptible to being reversed except at VERY high cost. So, I think that the PPT/Fed axis, which has its base at the Fed branch in New York, will stop printing and distributing dollars. This will lead to a market crash very soon, since the only thing holding up this market are PPT banks buying stocks and index futures with perpetually renewing "loans" from the Fed (aka: gifts from the Fed) that they will never pay back.
My best analogy for the current crisis (including "recovery") is the pre-barf feeling. Trying to hold it makes everything worse, taking medicine only masks and prolong the suffering. The body knows how to best eliminate the poison but our hubris turned into stupidity want to keep it inside.
The post-barf is such a relief compared to just seconds before. It was quick and not so bad after all if messy. Clean-up, wash and we are ready to go.
Stop printing money, let the failed institutions fail, chain-gang the crooks that created and boosted this ponzi. In a few months we'll be energized to recreate the good that was lost and live well again for a few decades until the next cycle (no build-better-world utopia for me).
Just barf already.
Barf? Maybe. But Ben will be back with another tray of tequila shots when you wipe your mouth off and come back from the bathroom.
If I may, I'd like to expand on your analogy:
Diarrhea (don't take kaopectate)
Coughing (don't take cough suppressants)
Fever (don't take fever reducers)
Debt: Don't take the money
"If stupidity got us into this mess, why cant it get us out??" ~ saw this somewhere, thought it was hilarious.
I've had the same analogy in my head for a while.
I'm afraid that maybe we should just get used to it. We may not purge for a long while.
Oil crashed not due to market influences, but due to U.S. Goobermint manipulation/intervention. Approximately ten days prior to the crash the U.S. Goobermint released PHYSICAL oil from the SPR accepting REPLACEMENT IN-KIND from U.S. Gulf oil.
Gee! I wonder which side of this trade Goldman was on?
or maybe it tanked due to the fact that demand was crashing due to a massive recession and supply was being horded by WS traders.
The oil crash had nothing to do with the supply/demand picture. It happened because the speculators needed cash to meet margin calls on their mortgage crap that just started to crumble. Their other illiquid assets were in the toilet and the energy futures were one of the few things that they could liquidate quickly. In addition, they were also faced with the larger than expected withdrawal rate coming from their investors.
I dont think the US stock market indices will drop too much in the face of a 20% rise in the USD. I think gold will drop a ton though.
Why does the title contain a quote that does not appear in the article?
Not only is the quote in the headline fabricated, but the headline gives the completely misleading impression that Goldman is predicting a 20% reversal in the dollar.
Yeah, it would be better summarized that GS doesn't think there is a speculative bubble in the dollar carry trade; however, if and when a reversal in the dollar happens, GS says that we'll know that it was a speculative dollar carry trade if a 20% decline occurs in 3 days rather than 3 months. Not much there from a predictive standpoint.
a small matter of "semantics" :-)
When the cab driver is doing the dollar carry trade maybe it's time to get out.
My unemployed buddy is playing the stock market like his full time job now. Also, many seniors in HK/China are back at the game. How humans forget so quickly what transpired just over half a year ago.
But this time, it is different!
Day traders keep Wall Street employed...
If he doesnt have an extra pair of eyes in his forehead that's perhaps a good idea; and if he did, I'd wonder why you'dve got in the cab in the first place
A 20% snap is theoretically possible in 3 days, and there's no speculative carry bubble? So the world's largest economy - by GDP - can experience a 1/5 change in its currency's valuation in 3 days and it's not a bubble.
I wonder what Goldman calls the forceful addition of hot breath to bubble gum? A research report, I guess.
You can get that just in perception alone. Now much more and you're outside perception boundries and there had better be some beef on the bun.
By now it is apparent that Goldman Sucks' public statements are composed by unemployed former Clinton handlers/writers.
Their internal communications are what we need to see. Particklelerly those between Dimon, Paulson, Geithner, Bernanke, Lord Blankfein,and Greenspan. Along with those passed on to lieutenants like Gary Gensler at CFTC, Orszag at budget, and assorted other shadow men.
The code in their pubic statements is impenetrable without more back story comparisons.
What, what , what ? An actual call from GS Strat made public ... WOW ... must underscore how important they deem the event to be if they themselves want to be so publicly on record. Still, the $DXY's technical profile requires a 135 / 144 minute close above 75.77 to shift the hourly from bearish to simply neutral and then two consecutive daily closes above 76.82 / .89 to signify markedly bullish intent (and the beginning of hellaciously impulsive thrust higher over the next 6-16 months. MAJOR GLOBAL INFLECTION possible right now.
It could be a trap set-up by GS.
fwiw, GS has made alot of public calls, they are well worth evaluating
q4-07, they had a top twenty short tech list, hmmm, how did that turn out, lol
q2-08, 200 oil, ahhhh, they raped the guy in oklahoma, and distrubeted holdings from 10 years back
q1-09, 775 put on the 500 was there big call opx in feb, hmm, right on the money
q2-09, 1050 spy, and 85 oil.......one hit, working on the other
q4-09, tad bearish info coming out....
My guess is it is a way too let all the other big boys know how they are positioned..........so right now.......you cuould probably think as in 3 days, oh thats day ofter opx, lol, or thru feb 15th or so, feb. opx..........enough of the public should be in that the short side should be the right side
+1!
Question for the cynical ones out there.
Do you think it's possible that IMF/Government Sachs are setting up contrarian (educated) investors, and a few sovereign nations for a bit of a shock?
It occurred to me that the IMF is merrily unloading its 210 tonnes of gold at record prices while the HFT driven stock market is inflated with freshly printed money. As soon as the Fed/Goldman Gang (or whatever malevolent puppet master really calls the shots) decides to press the detonate button, the stock market loses '20% in 3 days', the dollar puts in a mega rally, gold drops accordingly, and the IMF/Goldman/JPM/Rothschild cartel get to swap their tax payer funded record reserves for gold before the real dollar decimation begins?
Whatcha think?
GS wasn't wrong on their oil $200. They were busy being long and squeezing Semgroup out of their shorts. Then they put a $200 call out to get the greater fools to take them out of their position.
So, correct me if I've misunderstood this:
1) The carry trade is not yet speculative.
2) A 20% dollar rally is to be expected over the next 3 months.
3) If the carry trade were speculative, a 20% rally could be expected over the next 3 days, but it's not speculative, so (subtext, not quite explicitly expressed) expect a 3 month 20% rally.
Is that it?
While I certainly do believe that there are elements to the drop in the dollar due to the carry trade effect, we have reached levels that we were at prior to the crash. I think that they are saying that if it continues at this pace from here, then there will be a "real" bubble. However, until that happens, there are many a factor involved in the drop of the dollar.
So what happens if the Chinese decide to unpeg from the dollar? Could we not see the dollar and equities rise together?
Child please. There are never any bubbles except in hindsight. There is absolutely no bubble in gold, silver, oil, etc.
Move along, nothing to see here.
I am still expecting a *USD rally*
Daily charts of key indices are still giving bearish warnings.
Is the bear market rally ending ?
http://www.zerohedge.com/forum/market-outlook-0
Didn't one of Goldman's hedge funds lose some serious coin (to the tune of billions) on their own AUD/JPY trade implosion? Can't remember if it was 2008 or 2007 though, but hey - they're never wrong.
Hmmmm, 3 days. With all the bad news coming out and the dawning realisation that the economy really is stuffed (note the rampant Fed jawboning about how all is wonderful) makes one wonder if in 3 days, Friday, will be the beginning of a very interesting 3 months.
technically goldman went BK in 08
Goldman will be bk again.
The risk here is that dollar strength will bring a market correction, which will further strengthen the dollar, and the cycle goes on. The market should decouple from the dollar or the risks are higher than acceptable.
time123
http://invetrics.com