RENEWED CARRY TRADE VOLUME WILL AID DEVELOPING COUNTRIES bdstock.com Market turbulence and volatility have lessened, if only to allow investors time to catch their collective breaths before the next domino falls in Europe. Caution has its grip on the markets at present. Uncertainty has yet to dissipate for new investment strategies to take wing, and in the interim, the debate swirls as to whether the “flavor” of this recession is of the “double-dip” variety or not. However, veteran forex traders are beginning to see that the stars are lining up for a new season of the popular “carry trade” forex strategy. The “carry trade” is essentially a play on interest rate spreads between two countries. An investor sells one country’s currency, invests by buying the opposing pair’s currency, and then pockets the difference in prevailing interest rates on a daily basis. Typically, hedge funds and international banks have borrowed Japanese Yen, where interest rates are near zero, and then invested in a country where the economy is growing and interest rates are higher. With the addition of leverage, these trading strategies can easily yield double-digit returns for the savvy investor. However, if a protective hedging strategy is not put in place to lock in gains, the reverse scenario, one of double-digit losses, can occur in the blink of an eye when the “Base” currency suddenly strengthens. It is difficult to track the flow of “carry trade” capital at any one point in time, but finance ministers, concerned about the potential negative impact on their country’s currency when an unwinding takes place, have estimated the total figure to be in the $1.5 to $2 trillion range. The debt crisis in Europe caused much unwinding of the current carry trade “overhang” as it is called. Capital immediately flowed to “safe havens”, especially U.S. Treasuries and precious metals. The damage could be easily seen in the USD currency charts versus the currencies of many economically favorable countries. The “destination” countries this time around had been Australia, New Zealand, and also developing countries like India. Despite good economic fundamentals, all three of these currencies took a pounding as a selling spree commenced. With that as a backdrop, it appears that capital is currently parked in the U.S. and waiting to find an appropriate home. The recent strengthening of the U.S. Dollar has not been due to fundamentals. Debt and deficit issues have not been materially moderated, and although recent economic news has been promising, the recovery has a long way to go. Opportunistic investors will soon realize that “carry trade” profits abound overseas and begin their search for potential targets. Third world developing countries continue to grow as outsourcing, technology and globalization trends favor new IPO’s and progressive existing industries. Their plans for growth far exceed the averages witnessed in the developed world, which still has a way to go to find stable economic growth of any magnitude. India and Bangladesh will both be on investor radar screens. The IPO performance of new company issues have exceeded 500% in the latter’s market, and new IPO’s are forthcoming in the near future. As traders keep a keen eye on their forex charts to determine the best timing for exit and entry, they will also be searching for the most advantageous markets to ply their respective carry trade strategies. Interest rates in the U.S. will remain near zero for some time to avoid any chance that a recovery will stall. Soon, fundamentals will again weaken the Dollar, further exacerbating the carry trade phenomenon, thereby supporting an increased flow of capital to other high growth regions of the world.