Sensex

Sunday, December 09, 2007

$$ DreamGains !! $$ Oriental Bank Of Commerece - ICICIDirect

Recent Activity
Visit Your Group
Yahoo! Finance

It's Now Personal

Guides, news,

advice & more.

Ads on Yahoo!

Learn more now.

Reach customers

searching for you.

Real Food Group

Share recipes,

restaurant ratings

and favorite meals.

.

__,_._,___

$$ DreamGains !! $$ How the “Carry Trade” and Capital Tsunamis Are Pushing the Gold Price Up

How the "Carry Trade" and Capital Tsunamis Are Pushing the Gold Price Up
By: Julian D. W. Phillips

 

The gold price has not only been reacting to the absolute levels of the oil price and the fall of the $, but to the instability, uncertainty and downright fear in the Capital markets and the banking system.    Two reasons why there is such a drama has been the activities of the "Carry Trade" and the resultant Capital Tsunamis, or even the complete lack of available capital [much as the shoreline pulls right back before the Tsunami hits].

 

"Carry Trade"

One wrong picture we must correct is that it is Japanese Housewives who are behind the "carry trade".    This is a cute but ridiculous concept.   The "carry trade" is a group title for a type of trading carried on all over the world where interest rate differentials allow borrowing in one currency to lend in another.    Any currency trader anywhere in the world can do this if he has the requisite standing with the banks.   The bulk of these traders are housed in massive dealing rooms in the vast majority of the banks in the world.    These operations may sound simple on the surface, but in reality can be difficult to assess accurately and even more difficult to execute.   The currency traders at the world banks and they watch their screens every moment, moving and trading with every change in exchange rates, closely in touch with in-house research.   These are clever young lads; working for their annual bonus with an eye on the latest Porsche.   They have enormous financial power, but are held on a tight leash by their bosses.

 

The 'carry trade' concept comes with exchange rate risks, which are part of the assessment of potential profits.    The Yen was ideal because it was relatively stable against the U.S.$ until recently after a weakening trend over the last year as it fell from around Y100:$1 to Y122:$1.   Then in the last month the Yen turned viciously onto a strengthening trend, taking it back to Y109:$1.    The question now is will the Yen weaken again?   If it does then the 'carry trade' opportunity reappears. 

 

But to even think that only the Yen has to be part of this business is again naïve.   The speed of the change in the Yen's value was probably precipitated by these traders as they saw the dangers of a Yen strengthening and a $ weakening.    What would you do in that position?   Why, close out your borrowing in Yen and open it in the $ where interest rates and the exchange rates turned down.   If you had lent into the € or the NZ$ or the Australian $, or even the € and you would hold that position, setting it against the U.S.$.   With a strengthening of the Yen, you wait until it peaks [in your opinion] then reopen your borrowing in Yen and close it in the U.S. $.   These are short-term traders who like positions to hold as long as they can to maximize interest income, but stay nimble on their toes, grabbing each opportunity as it rises and closing positions in a heartbeat.    At times working these desks can be as exciting as driving a Ferrari.   No wonder these Traders are burned out by the time they reach 40.  

 

They contribute heavily to the creation of massive Capital flows that create the rising volatility in the markets that we are seeing right now.    Combine these with other Soros like Traders alongside genuine Investors like Sovereign wealth funds, you not only have potentially massive Capital Tsunamis, you have a very real precipitant for much more uncertainty and instability.    One crack in the hull of the global monetary system and the capital will flood out or in.

 

The Capital Tsunami's won't go away

Using the $ to pay for purchases of currencies with higher yields is proving to be the most profitable trade in the foreign-exchange market amongst the "Carry Trade".

 

A basket of currencies including the British Pound, Brazilian Real, and Hungarian Forint financed with dollars returned 17% this year, compared with 9% when funded in the Yen and 7% in Swiss Francs.   Falling U.S. interest rates and increasing volatility in the Yen and Franc are making the trade even more appealing.    With the $ giving the appearance of being in free fall, it increases the attractiveness of using the currency to fund investments.

 

The last time the U.S. $ was used for so-called "carry trades" was in 2004, when the Federal Reserve's target rate for overnight loans between banks was 1%.    Since then, it has weakened 18% on a trade-weighted basis. The International Monetary Fund says the $ made up 64.8% of central banks' currency reserves in the second quarter, down from 71% in 1999, after the € was introduced.

 

Investors are borrowing the $ and using the money to buy assets in countries with higher interest rates even though U.S. borrowing costs are 4% points more than the Bank of Japan's and 1.75% points above the Swiss National Bank benchmark.   Investors may switch more than $100 billion of borrowing from Yen or Francs into the $ in the next two years for 'carry trades'.

 

The value of futures contracts held this month by hedge funds and traders betting against the $ was a record $33.9 billion more than contracts that profit from a gain.    Pacific Investment Management Co., which oversees the world's biggest managed bond fund, is selling dollars against the Brazil Real, Mexican Peso, Korean Won, and Singapore $.    "When we think about currencies on a three-to-five-year basis we're very bullish on emerging markets versus the U.S. dollar," said Pimco. "That view is only reinforced when you look at interest-rate differentials."

The Real rose 18.5% this year and Singapore's currency strengthened 6.4%, while the Won was little changed.     The Mexican Peso fell 1.4%, the only one of the 16 most-traded currencies to do worse in the foreign exchange market.

 

Using a currency to finance trades does drive down its value as we saw in the exchange rate of the Yen.    Former Japanese vice finance minister Hiroshi Watanabe said in May that one reason the Yen had fallen to a record low against the € was because it was funding about $500 billion of "carry trades".

 

All in all the above information confirms that "Carry Trading" is here to stay and getting bigger and bigger.    It is a large contributor to the volatility of exchange rates and financial ruptures in the world money system.   It is "hot money" and likely to fuel speculation against vulnerable currencies.   

 

The instability and uncertainty such trading fuels will continue to make gold more and more attractive and the foundation of paper money more and more fragile.    When one hears the Fed Chairman reflect this atmosphere, you just know some will seek the safety of gold, at least.   But some will become many as instability and uncertainty is reflected in many market places.

 

__._,_.___
Regards

BigGains !!
Recent Activity
Visit Your Group
Yahoo! Finance

It's Now Personal

Guides, news,

advice & more.

Featured Y! Groups

and category pages.

There is something

for everyone.

Yahoo! Groups

Join a Health

& Fitness Group

or create your own.

.

__,_._,___

$$ DreamGains !! $$ FOMC Expected to Cut Rates

The Fed continues to be more concerned with growth in the economy (rather than inflation), and this became even more evident with its decision to further cut rates in November. The market is once again pricing in a 25 basis point Fed funds rate cut, and possibly a 25 basis point cut in the discount rate for the December 11th meeting -- as a result of more turmoil in the lending industry. We continue to keep an eye on the inflation posture, as a result of high energy and food costs. Luckily, the energy and food markets have stabilized a bit since the last Federal Open Market Committee (FOMC) meeting, which is further putting the spotlight on growth rather than inflation. The trends in several commodity markets are clearly intact, and are pointing to higher prices longer term. For this reason, the Fed decision was not unanimous to cut rates last month. According to Dennis Gartman, editor of The Gartman Letter, the Fed is a creature of habit: Once it starts cutting rates, it tends to continue to cut rates longer than necessary.

Even though inflation is increasing as a result of high food and energy costs, 'tis the season for shopping! According to the Redbook retail sales numbers that came out last week, consumers continue to shop and that is curtailing some of the markets' immediate concern of inflation. The most recent Johnson Redbook retail sales report showed that sales increased 2.7% versus +.3% previously. The biggest area of concern in the retail sector appears to be big box shopping though. The market is keeping an eye on the strength of the holiday shopping season. The post-Thanksgiving weekend data was mixed. Consumers made a favorable number of purchases, but are expected to spend less per person than last year. 

 

Last week, the existing home sales and new home sales figures were released. Both came out weaker than expected. The existing home sales were 4.97 million units sold versus 5.00 million units expected. The new home sales were .728 million units sold versus .750 million units expected. To further add salt to the wound, the previous month's figures were revised lower for both the new home sales and existing home sales. It is also no secret that the market is expecting the highest numbers of resets to hit the market in the first half of 2008. This is putting continued pressure on the market. Many consumers are looking for a good deal, and may expect to see further housing price pressure in 2008 -- causing potential buyers to look longer. Another factor that could affect the market is the government's attempt to try to freeze sub-prime rates. The market will be watching any sort of bailout attempts closely. As a result of the weaker housing numbers, it was no surprise to see durable goods orders lower as well. Durable goods orders came out down .4% versus an expected unchanged report.

We are going to be keeping an eye on the trend of non-farm payrolls to further measure the health of the economy. As a refresher, by first glance, last month's unemployment report came out much better than expected -- with an increase of 166,000 non-farm payrolls. According to Gartman, the report was actually much weaker than expected when further analyzing the details of the report. The increase is part of the "establishment" survey. The "household" survey showed a decline of 250,000 jobs. Gartman believes that the household survey has historically been a much better indicator of the jobs environment. Secondly, with such a large increase in non-farm payrolls, the household number might explain why the unemployment rate remained unchanged last month. The actual unemployment data will be released by the time this article is published. For now, reiterate that Friday's monthly unemployment report is expected to show non-farm payrolls increase to 70,000 jobs versus an increase of 166,000 last month --which is consistent with a declining jobs trend and weaker. If the trend is declining now, the market will likely be more concerned with further weakness after the holiday season, due to a decline in some seasonal jobs and the unwillingness for employers to cut jobs just before the holidays.

The stock market continues to be extremely volatile as a result of the financial tug of war. The hint of any sort of rate cut continues to be near-term supportive to stocks, because the market views ease of lending practices to be bullish for growth. I have also heard several comments lately that foreign investors view the stock market as a long-term buying opportunity, primarily due to the weaker U.S. dollar allowing foreign investors the luxury of increased purchasing power. In my opinion, the rate cuts might provide temporary relief to the economy -- and most notably the stock market. However, it is questionable as to how it will affect the market longer-term trend. Fed rate cuts are not indicative of a healthy economy. We are also uncertain if further credit crunch surprises exist.

 

Finally, the current Fed policy has not been friendly to the longer-term outlook of the U.S. dollar. Although the dollar has been rallying the past few days, it is far from making a long-term trend change. Major long-term resistance is approximately 8000 for the dollar index contract. Other countries such as Canada and England have recently cut interest rates, which has supported the dollar index.

Fed Watch:
The market is expecting the Fed to lower the Fed funds rate by 25 basis points, and possibly the discount rate by 25 basis points, at the upcoming FOMC meeting on December 11th.

 

__._,_.___
Regards

BigGains !!
Recent Activity
Visit Your Group
Yahoo! Finance

It's Now Personal

Guides, news,

advice & more.

Green Y! Groups

Environment Groups

Find them here

connect with others.

Fitness Challenge

on Yahoo! Groups

Get in shape w/the

Special K Challenge.

.

__,_._,___