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Yardeni, Wilson Cite Yen Carry Trade As Key Factor In Fed Debate
If you're the Fed, there are good arguments against coming out swinging with a 50bps rate cut later this month.
One of those arguments says 50bps would scare everybody to death. That's the old "What do they know that we don't?" worry.
Another argument says the data just doesn't support a half-point cut currently, what with jobless claims still sub-250,000 and the unemployment rate still sitting with a low four-handle, Sahm siren aside.
I could go on. Most readers can make their own list. Thes
It makes sense that the carry trade should re-emerge, since rate spread remains large. But it would be a careless carry trader indeed who was caught offsides now by a 50 bp cut, and the riskiest funding destinations (NVDA, Megas, semis, MXP, etc) are near or at their 1M lows, so perhaps the incremental funding went to lower-risk destinations (bills, CP, etc) as it should.
What’s the more telling dynamic, return form bottoming and/or un-inversion? Or are both basically similar stats?
The Fed should stick to its mandate. Inflation and employment/growth, along with the safety and soundness of the banking system, including the liquidity and functioning of the credit markets. The rest is better left to market forces, investors, and traders. The effects of the yen carry trade should only matter if it seriously impacts its core mandate. Achieving its core mandate is hard enough.
I agree. We just saw a big unwind of the yen carry trade fail to discombobbilize the functioning of the financial system. So why think that an unwind of whatever carry trade has been put back on in the last month would do it?
Some out there suggest that the Yen carry trades have been cleared out.
Now the mother lode of carry trades can be found in the yuan markets. I’d wager they are mostly done in the “bespoke” offshore yuan markets. Will the PBC be raising rates soon? Doubtful, but “administrative” efforts to shore up the renminbi are not all that unlikely.
JL – In general, the carry boys play a non-stop game of chicken with the CBs. Is a move against you a buying opportunity or reason the bail out? Often as not it’s the former, but when it’s the latter it’s painful thanks to the miracle of leverage.