"A Funny Old World" - The EM Carry Trade Collapse 'Deja Vu, All Over Again' From Citigroup
Spot the similarities.
From CitiFX Technicals: It's a funny old World
- 1989-1991: Housing and savings and loan crisis: Fed eases aggressively as economy enters deep recession
- 1992-1994: Existing financial architecture in Europe (ERM) blows apart
- 1995-1998: European convergence trade in both FX and Bond spreads keeps European currencies relatively stable vis a vis the USD with a good rally in 1998.By 1996 BUBA has lowered the discount rate to 2.5% while US rates remain well below the pre-crisis highs of 9.75% in 1989.
- The carry trade and capital flow into emerging markets (Asia in particular) is center stage
- March 1997: In a seemingly “innocuous” move the Fed “tinkers” by raising rates 25 basis points.
- April 1997: Japan raises its consumption tax as USDJPY has rallied from a post Kobe Earthquake low of 79.7 to 127.50 . USDJPY collapse to 111 by June
- June 1997-Jan 1998: Severe reaction in Asian currencies as “hot money flees”
- August-October 1998: Russia defaults, Long term capital folds and the Fed eases aggressively as the Equity market drops 22% (S&P)
History may not repeat…..but it sure RHYMES
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