1 CARRY TRADE AND REGIONS HEINER FLASSBECK Director Division on Globalization and Development Strategies 2010

1

CARRY TRADE AND REGIONS

HEINER FLASSBECK

DirectorDivision on Globalization

and Development Strategies

2010

EVOLUTION OF PRICES IN SELECTED MARKETS AND EVOLUTION OF PRICES IN SELECTED MARKETS AND COUNTRIES, OCTOBER 2008–JUNE 2010COUNTRIES, OCTOBER 2008–JUNE 2010

(Index numbers, 1 OCTOBER 2010 = 100)Equity markets

0

25

50

75

100

125

150

175

1/10/2008 1/2/2009 1/6/2009 1/10/2009 1/2/2010 1/6/2010

Budapest Stock Exch Index (Hungary)Jakarta Composite Index (Indonesia)FTSE/JSE Africa All Shr (South Africa)Mexico Bolsa Index

Commodity markets

0

25

50

75

100

125

150

175

1/10/2008 1/2/2009 1/6/2009 1/10/2009 1/2/2010 1/6/2010

S&P GSCI Cotton Official Close Index

S&P GSCI Brent Crude Official Close Index

S&P GSCI Copper Official Close Index

National bond marketsa

0

25

50

75

100

125

150

175

1/10/2008 1/2/2009 1/6/2009 1/10/2009 1/2/2010 1/6/2010

Japan New Zealand

United Kingdom United States

Currency markets

0

25

50

75

100

125

150

175

1/10/2008 1/2/2009 1/6/2009 1/10/2009 1/2/2010 1/6/2010

Australian dollar to Japanese yen

New Zealand dollar to Japanese yen

Brazilian real to Japanese yen

DAILY MOVEMENTS OF PRICES AND RETURNS BETWEEN 11/2008 AND 11/2009 DAILY MOVEMENTS OF PRICES AND RETURNS BETWEEN 11/2008 AND 11/2009 IN RELATION TO THE EXCHANGE RATE OF THE BRAZILIAN REAL TO THE JAPANESE IN RELATION TO THE EXCHANGE RATE OF THE BRAZILIAN REAL TO THE JAPANESE

YENYEN

R2 = 0.6938

165

175

185

195

205

215

225

0.018 0.02 0.022 0.024 0.026 0.028


S&

P G

SC

I N

on

-en

erg

y O

ffic

ial

Clo

se I

nd

ex

R2 = 0.8286

7 000

7 500

8 000

8 500

9 000

9 500

10 000

10 500

11 000

11 500

12 000

0.018 0.02 0.022 0.024 0.026 0.028


S&

P C

om

po

site

In

dex

R2 = 0.7907

2.0

2.2

2.4

2.6

2.8

3.0

3.2

3.4

3.6

3.8

4.0

0.018 0.02 0.022 0.024 0.026 0.028


Un

ited

Sta

tes

Yie

ld o

n 1

0-ye

ar B

on

d

R2 = 0.8781

300

350

400

450

500

550

600

650

700

0.018 0.02 0.022 0.024 0.026 0.028


S&

P G

SC

I B

ren

t C

rud

e O

ffic

ial

Clo

se I

nd

ex

Correlation between day-to-day price movements of currencies of selected countries (in relation to Japanese Yen) and selected equity prices indices, commodity price indices and CDS spreads, January 2008 - January 2010

R2 = 0.8081

0.2160

0.2360

0.2560

0.2760

0.2960

0.3160

0.3360

0.3560

0.3760

0.3960

4308 5308 6308 7308 8308

Swiss Market Index

Russian Ruble

R2 = 0.898

0.0144

0.0164

0.0184

0.0204

0.0224

0.0244

0.0264

199 299 399 499 599

S&P GSCI CoppOfficial Close Index

Brazilian Real

New Turkish Lira

R2 = 0.8008

0.01

0.01

0.01

0.01

0.01

0.02

0.02

0.02

0.02

2 3 3 4 4

Sweden Yield on a 10-year bond

Australian Dollar

R2 = 0.8062

0.01

0.01

0.01

0.01

0.02

0.02

197 297 397 497 597

Hungary CDS USD Spread 5 Y

5

Uncovered interest returnNominal exchange-rate changeInterest rate differential

YEN-CARRY TRADE ON THE ICELANDIC KRONA, US DOLLAR AND BRAZILIAN REAL, 2005-2007

Krona

-10

-8-6

-4

-20

24

6

810

12

1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5

2005 2006 2007

Pe

r ce

nt

Dollar

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5

2005 2006 2007

Pe

r ce

nt

Real

-10

-8-6

-4-2

02

46

810

12

1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5

2005 2006 2007

Pe

r ce

nt

Note: A positive change in the exchange rate means an appreciation of the corresponding currency vis-à-vis the yen.

6

YEN-CARRY TRADE ON THE ICELANDIC KRONA, US DOLLAR AND TURKEY LIRA, 2005-2007

Krona

-10

-8-6

-4

-20

24

6

810

12

1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5

2005 2006 2007

Pe

r ce

nt

Dollar

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5

2005 2006 2007

Pe

r ce

nt

Turkey New Lira

-10-8-6-4-202468

1012

1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5

2005 2006 2007

Pe

r ce

nt

Hungarian Forint

-10-8-6-4-20

2468

1012

1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5

2005 2006 2007

Pe

r ce

nt

7

CARRY TRADE OPPORTUNITIES OF THE ICELANDIC KRONA VIS-À-VIS THE DOLLAR, 2005–FEBRUARY 2010

-10

-8

-6

-4

-2

0

2

4

6

8

10

1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1

2005 2006 2007 2008 2009 2010

Per

cen

t

Uncovered interest return Interest rate differentialNominal exchange-rate change

8

CARRY TRADE OPPORTUNITIES OF SELECTED CURRENCIES VIS-À-VIS THE DOLLAR, 2005–FEBRUARY 2010


Icelandic krona

-10

-8

-6

-4

-2

0

2

4

6

8

10

1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1

2005 2006 2007 2008 2009 2010

Per

cen

t

Hungarian forint

-10

-8

-6

-4

-2

0

2

4

6

8

10

1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1

2005 2006 2007 2008 2009 2010

Per

cen

t

Brazilian real

-10

-8

-6

-4

-2

0

2

4

6

8

10

1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1

2005 2006 2007 2008 2009 2010

Per

cen

t

Bulgarian lev

-5

-4

-3

-2

-1

0

1

2

3

4

5

1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1

2005 2006 2007 2008 2009 2010

Per

cen

t

9

UNCOVERED INTEREST RETURNS, EXCHANGE-RATE CHANGES, INFLATION AND INTEREST RATE

DIFFERENTIALS, 1995-2010

ICELAND

-10

-8

-6

-4

-2

0

2

4

6

8

10

1995 1998 2001 2004 2007 2010

Per

cen

t

60

70

80

90

100

110

120

130

140

Inde

x nu

mbe

rs, 2

000

= 1

00

Real exchange-rate change Inflation rate differentialReal exchange-rate trend (right scale)

-20

-15

-10

-5

0

5

10

15

20

1995 1998 2001 2004 2007 2010

Per

cen

t

Uncovered interest returnInterest rate differentialNominal exchange-rate change

10



BRAZIL

-10

-8

-6

-4

-2

0

2

4

6

8

10

1995 1998 2001 2004 2007 2010

Pe

r ce

nt

60

70

80

90

100

110

120

130

140

150

160

Ind

ex

nu

mb

ers

, 2

00

0 =

10

0

Real exchange-rate change Inflation rate differentialReal exchange rate trend (right scale)

-20

-15

-10

-5

0

5

10

15

20

1995 1998 2001 2004 2007 2010

Pe

r ce

nt


11



TURKEY

-10

-8

-6

-4

-2

0

2

4

6

8

10

1995 1998 2001 2004 2007 2010

Pe

r ce

nt

60

80

100

120

140

160

180

Ind

ex

nu

mb

ers

, 2

00

0 =

10

0

Real exchange-rate change Inflation rate differentialReal exchange rate trend (right scale)

-20

-15

-10

-5

0

5

10

15

20

1995 1998 2001 2004 2007 2010

Pe

r ce

nt


12



CHINA

-10

-8

-6

-4

-2

0

2

4

6

8

10

1995 1998 2001 2004 2007 2010

Pe

r ce

nt

60

70

80

90

100

110

120

130

140

Ind

ex

nu

mb

ers

, 2

00

0 =

10

0

Real exchange-rate change Inflation rate differentialReal exchange-rate trend (right scale)

-20

-15

-10

-5

0

5

10

15

20

1995 1998 2001 2004 2007 2010

Pe

r ce

nt

Uncovered interest returnInterest rate differentialNominal exchange-rate change

13



EASTERN EUROPEEastern-European Countries

-10

-5

0

5

10

1996M3 1997M11 1999M7 2001M3 2002M11 2004M7 2006M3

0

20

40

60

80

100

120

140

160

180

200

Real exchange-rate change

Inflation rate differential

Real exchange-rate trend (right scale)

Eastern European Countries

-10

-8

-6

-4

-2

0

2

4

6

8

10

1996M3 1997M11 1999M7 2001M3 2002M11 2004M7 2006M3

Uncovered interest return

Interest rate differential

Nominal exchange-rate change

Speculation opportunities, appreciation trend and volatility persist despite the reduction in interest

rates.

14



ASIAAsia

-10

-8

-6

-4

-2

0

2

4

6

8

10

1996M3 1997M11 1999M7 2001M3 2002M11 2004M7 2006M3

60

70

80

90

100

110

120

130

140

Real exchange-rate change

Inflation rate differential

Real exchange-rate trend (right scale)

Asia

-10

-5

0

5

10

1996M3 1997M11 1999M7 2001M3 2002M11 2004M7 2006M3

Uncovered interest return

Interest rate differential

Nominal exchange-rate change

Little speculation opportunities, moderate average appreciation and volatility.

Documents

1 CARRY TRADE AND REGIONS HEINER FLASSBECK Director Division on Globalization and Development Strategies 2010