Nov
8th
Sun
8th
Lee argues that the carry trade has two prerequisites; interference in the markets by governments and weak domestic credit demand. The first is currently present; plenty of governments (including China’s) are preventing their currencies from rising too far against the dollar. Lee’s second condition is less obvious but insightful. If a carry trade currency also had strong domestic credit demand, that would show up as rapid money supply growth; the central bank would take fright and raise interest rates, negating the basis for the carry trade. Both the US now, and Japan earlier this decade, have indeed seen weak credit demand.
Tags:
carry trade finance
