Upload
investingtips
View
346
Download
4
Tags:
Embed Size (px)
DESCRIPTION
http://www.TheForexNittyGritty.com - Euro Carry Trade - Will 1% loans from the European Central Bank to struggling European banks result in stabilization of the European banking system or a Euro carry trade?
Citation preview
EURO CARRY
TRADE
BY
WW
W. T
HE
FO
RE
XN
I TT
YG
RI T
TY
. CO
M
WILL 1% LOANS FROM THE EUROPEAN CENTRAL BANK TO STRUGGLING EUROPEAN BANKS RESULT IN STABILIZATION OF THE EUROPEAN BANKING SYSTEM OR A EURO CARRY TRADE?
W W W . T H E F O R E X N I T T Y G R I T T Y. C O M
THE EUROPEAN UNION HAS BEEN IN A SOVEREIGN DEBT DILEMMA FOR A COUPLE OF YEARS.
W W W . T H E F O R E X N I T T Y G R I T T Y. C O M
THE SOUTHERN TIER OF EU NATIONS, PLUS IRELAND, HAS BECOME THE PIIGS (PORTUGAL, IRELAND, ITALY, GREECE, AND SPAIN) GROUP.
W W W . T H E F O R E X N I T T Y G R I T T Y. C O M
THESE NATIONS, MOST NOTABLY GREECE, WOULD HAVE BEEN UNABLE TO FINANCE THEIR NATIONAL DEBTS WITHOUT AID FROM LENDERS, THE IMF, THE EUROPEAN CENTRAL BANK AND OTHER EU NATIONS IN PARTICULAR.
W W W . T H E F O R E X N I T T Y G R I T T Y. C O M
THE POSSIBILITY OF A BREAKUP OF THE EUROPEAN UNION OR AT LEAST THE DEPARTURE OF GREECE AND A COUPLE OF OTHER NATIONS LOOMED OVER THE CONTINENT FOR THE LAST FEW MONTHS.
W W W . T H E F O R E X N I T T Y G R I T T Y. C O M
JUST RECENTLY EU LEADERS MET IN PARIS AND AGREED TO AMEND THE EU TREATY TO ALLOW CLOSER FINANCIAL INTEGRATION.
W W W . T H E F O R E X N I T T Y G R I T T Y. C O M
(READ THIS AS PUTTING A CAP ON POLITICALLY MOTIVATED PORK BARREL SPENDING TO BUY LOCAL VOTES.)
W W W . T H E F O R E X N I T T Y G R I T T Y. C O M
IN ADDITION EU MEMBERS GAVE THE EUROPEAN CENTRAL BANK GREATER AUTHORITY AND AUTONOMY IN DEALING WITH THE OVERALL DEBT SITUATION AS MANY BANKS WERE WEAK
W W W . T H E F O R E X N I T T Y G R I T T Y. C O M
AND MANY CONSIDERED A RUN ON FRENCH BANKS A DISTINCT POSSIBILITY AS MANY HAD INVESTED HEAVILY IN BONDS FROM GREECE, ITALY, AND THE OTHERS.
W W W . T H E F O R E X N I T T Y G R I T T Y. C O M
BUT, JUST WHAT DOES THIS HAVE TO DO WITH A EURO CARRY TRADE?
W W W . T H E F O R E X N I T T Y G R I T T Y. C O M
THE EXPRESSION, CARRY TRADE, IS USUALLY ASSOCIATED WITH THE YEN AND NOT THE EURO.
W W W . T H E F O R E X N I T T Y G R I T T Y. C O M
JAPAN HAS HAD EXTREMELY LOW INTEREST RATES FOR TWO DECADES.
W W W . T H E F O R E X N I T T Y G R I T T Y. C O M
INVESTORS HOLDING YEN CAN ENGAGE IN FOREIGN EXCHANGE TRADING AND OBTAIN US DOLLARS OR OTHER INTERNATIONAL CURRENCIES.
W W W . T H E F O R E X N I T T Y G R I T T Y. C O M
THEN THE INVESTOR BUYS US TREASURIES IF HE NOW HAS DOLLARS OR, PERHAPS, ITALIAN OR GREEK NATIONAL DEBT BONDS IF HE HAS TURNED YEN INTO EUROS.
W W W . T H E F O R E X N I T T Y G R I T T Y. C O M
ANYONE WHO BOUGHT DOLLARS BEFORE THE RALLY LAST FALL AND THEN PURCHASED TREASURY BILLS BEFORE RATES FELL DID DOUBLY WELL.
W W W . T H E F O R E X N I T T Y G R I T T Y. C O M
ON THE OTHER HAND MANY JAPANESE REPATRIATED OFFSHORE ASSETS TO PAY FOR THE DESTRUCTION OF THE WORST EARTHQUAKE AND TSUNAMI IN THEIR HISTORY.
W W W . T H E F O R E X N I T T Y G R I T T Y. C O M
THIS YEN REPATRIATION SENT THE CURRENCY UP DANGEROUSLY FAST.
W W W . T H E F O R E X N I T T Y G R I T T Y. C O M
THE RISE IN THE YEN WAS ONLY HALTED BY THREATS OF THE G7 MINISTERS TO INTERVENE IN STRENGTH.
W W W . T H E F O R E X N I T T Y G R I T T Y. C O M
ANYONE WHO HELD OFFSHORE ASSETS IN A YEN CARRY TRADE DID POORLY AT THAT POINT.
W W W . T H E F O R E X N I T T Y G R I T T Y. C O M
THE POINT OF THE YEN CARRY TRADE IS TO HAVE OR BORROW ASSETS IN A NATION WHERE INTEREST RATES ARE LOW, CONVERT TO ANOTHER CURRENCY, AND INVEST WHERE INTEREST RATES ARE HIGH.
W W W . T H E F O R E X N I T T Y G R I T T Y. C O M
THE POINT IS ALSO THAT A CHANGE IN CURRENCY RATES DOES NOT ERASE ALL PROFITS.
W W W . T H E F O R E X N I T T Y G R I T T Y. C O M
THIS IS THE CONNECTION TO A SO CALLED EURO CARRY TRADE.
W W W . T H E F O R E X N I T T Y G R I T T Y. C O M
A CONCERN OF SOME IS THAT STRUGGLING EUROPEAN BANKS THAT HAVE RECEIVED 1% INTEREST LOANS MAY BE TEMPTED TO INVEST IN HIGH RISK, POTENTIALLY HIGH RETURN, DEBT.
W W W . T H E F O R E X N I T T Y G R I T T Y. C O M
WHETHER THIS WOULD BE EUROPEAN DEBT OR TO USE FOREIGN CURRENCY TRADING IN ORDER TO PRACTICE A EURO CARRY TRADE DEBT ELSEWHERE IN THE WORLD
W W W . T H E F O R E X N I T T Y G R I T T Y. C O M
THE POTENTIAL FOR PROFITS COULD BE GREAT, PROVIDING THAT THE GLOBAL ECONOMIC PICTURE BRIGHTENS.
W W W . T H E F O R E X N I T T Y G R I T T Y. C O M
ON THE OTHER HAND THE LOANS COULD AMOUNT TO THROWING GOOD MONEY AFTER BAD IF ANYONE TRIES SUCH AN AGGRESSIVE AND RISKY STRATEGY.
W W W . T H E F O R E X N I T T Y G R I T T Y. C O M
THE GOOD NEWS FOR THOSE FEARFUL OF SUCH A SCENARIO IS THAT OVERNIGHT DEPOSITS AT THE EUROPEAN CENTRAL BANK ARE AT AN ALL-TIME HIGH.
W W W . T H E F O R E X N I T T Y G R I T T Y. C O M
APPARENTLY MANY OF THE EUROPEAN BANKS THAT NEEDED BAILOUTS HAVE LEARNED THEIR LESSON.
W W W . T H E F O R E X N I T T Y G R I T T Y. C O M
THEY ARE AVOIDING ANY SEMBLANCE OF A EURO CARRY TRADE AND PUTTING THEIR SHORT TERM MONEY IN THE MOST SECURE LOCATION AVAILABLE, EVEN AT LOW INTEREST RATES.
W W W . T H E F O R E X N I T T Y G R I T T Y. C O M
FOR MORE INSIGHTS AND USEFUL INFORMATION REGARDING THE FOREX MARKETS AND FOREIGN CURRENCY TRADING, VISIT WWW.THEFOREXNITTYGRITTY.COM.