Nov 18

The Carry Trade Continues to Unwind: Update

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Over two months ago, we noted that it appeared the ‘carry trade’ between risky assets (represented by the S&P 500) funded by borrowings in a low interest rate currency (Japanese Yen) had seemed to unwind.  In other words, Yen strengthening coupled with S&P 500 declines may mean that the ‘carry trade’ was being unwound…and with it, we would have further signs of deleveraging in the world financial system.

In the update, below, it is fairly obvious that this unwind of the carry trade has been rather consistent over the last nine months and certainly has picked up in two of the last three months.  We’ve seen similar analyses, where the New Zealand dollar is substituted for the SP 500, as NZ has relative higher rates…and the results point to a similar conclusion.

Until we see this correlation decouple, the unwinding of the carry trade will continue to be a drag on global financial markets.

Interval Date Correlation SPX Return SPX End. Price JPY end price
Monthly 8/26/06 – 09/26/06 0.70% 3.35% 1336.34 117.11
Monthly 9/26/06 – 10/26/06 3.00% 4.06% 1389.08 118.38
Monthly 10/26/06 – 11/26/06 1.50% 1.06% 1400.95 115.9
Monthly 11/26/06 – 12/26/06 0.10% 1.32% 1416.9 119.15
Monthly 12/26/06 – 01/26/07 2.20% 0.48% 1422.18 121.54
Monthly 01/26/07 – 2/26/07 13.10% 2.13% 1449.37 120.65
Monthly 2/26/07 – 03/26/07 72.30% -0.69% 1437.5 118.13
Monthly 3/26/07 – 04/26/07 18.10% 4.07% 1494.25 119.57
Monthly 4/26/07 – 05/26/07 31.80% 1.62% 1515.73 121.79
Monthly 5/25/07 – 06/26/07 30.00% -1.36% 1492.89 123.26
Monthly 6/26/07 – 07/26/07 40.40% -0.58% 1482.66 118.68
Monthly 7/26/07 – 08/27/07 36.60% -0.88% 1466.79 115.87
Monthly 8/27/07 – 9/27/07 75.70% 4.60% 1531.38 115.63
Monthly 9/27/07 – 10/27/07 27.60% 0.34% 1535.28 114.18
Monthly 10/27/07 – 11/20/07 75.00% -6.04% 1439.7 109.98
Feb date of sell-off to date 2/26/07 – 11/20/07 50.50% 0.23% 1439.7 109.98
6 months prior to Feb sell off 8/26/06 – 02/26/07 0.40% 13.01% 1449.37 120.65