財經觀察 1936 --- Carry Trade Comeback

Carry Trade Comeback Means Biggest Gains Since 1999 on Yields

By Kim-Mai Cutler and Bo Nielsen

April 14 (Bloomberg) -- The carry trade is making a comeback after its longest losing streak in three decades.

Stimulus plans and near-zero interest rates in developed economies are boosting investor confidence in emerging markets and commodity-rich nations with interest rates as much as 12.9 percentage points higher. Using dollars, euros and yen to buy the currencies of Brazil, Hungary, Indonesia, South Africa, New Zealand and Australia earned 8 percent from March 20 to April 10, that trade’s biggest three-week gain since at least 1999, data compiled by Bloomberg show.

Goldman Sachs Group Inc., Insight Investment Management and Fischer Francis Trees & Watts have begun recommending carry trades, which lost favor last year as the worst financial crisis since the Great Depression drove investors to the relative safety of Treasuries. Now efforts to end the first global recession since World War II are sending money into stocks, emerging markets and commodities.

"The global economy seems to have reached an inflection point," said Dale Thomas, head of currencies at Insight Investment Management in London, which oversees $121 billion.

"We’re set for a period of some classic risk currency trades, where you sell the dollar against emerging-market currencies."

Carry trades use funds in countries with lower borrowing costs to invest in those with higher rates, allowing investors to pocket the difference. Speculators fled the strategy last year as central banks cut rates to revive growth, narrowing spreads, and as currency swings increased risks. Foreign exchange volatility expectations surged 73 percent in three days to a record high on Oct. 24, a JPMorgan Chase & Co. index shows.

Aussie, Real

Thomas recommends the Australian dollar and Brazilian real, where the benchmark central bank rate is 11.25 percent, or about 11 points more than the corresponding U.S. rate.

Borrowing U.S. dollars at the three-month London Interbank Offer Rate of 1.13 percent and using the proceeds to buy real and earn Brazil’s three-month deposit rate of 10.51 percent rate would net an annualized 9.38 percent, as long as both currencies remain stable.

Carry trades were profitable for most of the past three decades. They produced average annual returns of 21 percent in the 1980s with no down years, the best of four commonly used currency strategies, according to ABN Amro indexes.

Three Down Years

In the 1990s, carry trade investors suffered three down years, including a 54 percent dive in 1992, ABN Amro data compiled by Bloomberg show. From 2000 to 2005, the trade was again on top with average gains of 16 percent.

Then it dropped three years in a row in 2006-08, the longest streak since 1976-78, for an annualized average loss of 16.5 percent through Feb. 28. Most of the decline came after June 2008, as the collapse of U.S. subprime mortgages froze credit markets and led to the bankruptcy of New York-based Lehman Brothers Holdings Inc., the biggest corporate failure in history.

As investors fled to the safest assets, the greenback climbed 26 percent between July 15 and March 4, when it reached its highest in almost three years, according to the Intercontinental Exchange Inc. dollar index against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona.

Prices for Treasuries rose, sending the 10-year note yield to a record low of 2.0352 percent on Dec. 18, from 4.07 percent on Oct. 14.

Roaring Back

Last month, the carry trade roared back, with ABN Amro’s index gaining 4.6 percent, its best month since September 2003.

As of yesterday, the dollar had fallen about 5.6 percent from its March 4 high.

An equally weighted basket of currencies consisting of Turkish lira, Brazilian real, Hungarian forint, Indonesian rupiah, South African rand and Australian and New Zealand dollars -- bought with yen, dollars and euros -- earned an annualized 196 percent from March 2 to April 10. That trade produced a 41 percent annualized loss from September, when Lehman collapsed, through February.

Benchmark rates in those seven economies range from 3 percent in New Zealand and Australia to Brazil’s 11.25 percent.

Comparable rates in the euro region, Japan and the U.S. are 1.25, 0.1 and between 0.25 and 0.75 percent, respectively.

Smaller swings in foreign exchange are making the carry trade less vulnerable to a sudden wipeout. Currency volatility expectations fell to a six-month low yesterday from Oct. 24’s record, the JPMorgan index shows.

Volatility Peak

"There are increasing signs that FX volatility has peaked," Goldman Sachs said in a report titled "Time to Reconsider Carry" on April 8. "We think the conditions are about to fall in place to make carry strategies attractive again."

The risk is that global economies will continue to shrink, leading investors back to the most-traded currencies -- dollars, yen and euros -- and forcing emerging economies to reduce benchmark rates to encourage growth, narrowing interest spreads.

David Rolley, co-head of global fixed-income in Boston for Loomis Sayles & Co., isn’t convinced the carry trade’s recent gains will last.

The U.S. recession, now in its 17th month, has cost 5.1 million Americans their jobs, the worst drop in the postwar era.

Median estimates in a Bloomberg News economist survey predict unemployment will average 8.9 percent this year and more than 9 percent in 2010.

‘Very Muted’

"That does not look like we’ve had any momentum change," said Rolley, whose firm manages $106 billion. "People are not prepared to call an end to the global downturn as of yet. I think carry trade is going to come back, but it’s going to be very muted."

Jonathan Xiong, who oversees $18 billion as a vice president at Mellon Capital Management Corp. in San Francisco, said his firm is only "slightly into carry" right now. "We are slowly putting back on some particular positions, but not fully, because we still see some uncertainty," he said.

Investors starting carry trades are counting on U.S.-led efforts to end the global recession, including promises by the Group of 20 nations to spend $1 trillion through the International Monetary Fund, to bolster commodity and emerging- market currencies.

The U.S. government and the Federal Reserve have spent, lent or committed as much as $12.8 trillion to shore up its banking system and economy, including President Barack Obama’s $787 billion stimulus plan. That’s about 90 percent of last year’s $14.2 trillion gross domestic product, which is expected to shrink 2.5 percent this year, according to the median of 55 forecasts in a Bloomberg survey.

Emerging Markets

In the past, expansion in developed economies has sparked faster growth in emerging markets. Before last year, the U.S.’s economy had increased an average 2.5 percent annually this decade, while Brazil and China rose 3.5 and 9.3 percent.

Economies and currencies of countries most dependent on raw materials exports have benefited as prices rebounded in 2009, with the Standard & Poor’s GSCI Index of 24 raw materials gaining 6.6 percent in March after an almost flat February that followed a seven-month, 61 percent losing streak.

South Africa’s rand and New Zealand’s dollar are among the best performers against the U.S. dollar over the past month, data compiled by Bloomberg show. Though growth in Brazil and South Africa will slow this year, median Bloomberg survey predictions show them staying positive at 1 percent or less before jumping to 3.3 percent or more in 2010.

Fueling Demand

China is helping fuel demand for commodities, as manufacturing expanded for the first time in six months in March, according to an April 2 report by its National Bureau of Statistics and Federation of Logistics and Purchasing. The World Bank said on April 7 that China’s 4 trillion-yuan ($585 billion) stimulus may fuel a recovery there this year.

There are some positive signals in the U.S., too. Federal Reserve Chairman Ben S. Bernanke said March 15 that he saw "green shoots" in some financial markets and predicted the pace of economic contraction "will begin to moderate."

Consumer spending rose in January and February after six months of declines.

Those signs are boosting investments in stocks. The Standard & Poor’s 500 Index rallied 13.5 percent -- in the past month, its best since 1991, after falling 38 percent last year, the worst since 1937. The MSCI emerging markets index rallied 20 percent in the past month, also its best since 1991. It fell 54 percent last year, its worst ever.

Goldman Sachs

Goldman Sachs recommended on April 3 that investors use euros, dollars and yen to buy Mexican pesos, real, rupiah, rand and rubles from Russia, where the benchmark central bank rate is

13 percent. Using equally weighted baskets, that carry trade would have returned 8 percent in the past month, for an annualized 165 percent, data compiled by Bloomberg show.

"Group-of-three currencies are expensive while emerging- market currencies are cheap," said Themos Fiotakis, a London- based Goldman Sachs analyst. "The downside risks have declined significantly for emerging-market currencies. Even if these currencies remain flat, the carry is still attractive."

Bank of Tokyo-Mitsubishi Ltd. recommended selling yen and U.S. dollars as foreign-exchange markets "normalize." Adnan Akant, the foreign exchange chief in New York at Fischer Francis Trees & Watts, said he’s selling yen and Swiss francs while buying Australian and New Zealand dollars.

"There’s a lot to boost risk appetite since mid-March," said Akant, whose firm managed $22 billion in assets as of Dec. 31. "The carry trade is coming back. We are watching optimistically and cautiously."