New York: The US Federal Reserve left the benchmark federal funds rate unchanged in the 0-0.25% range on Wednesday. The Fed also stuck to its commitment to keep borrowing costs near zero for “an extended period”. Commenting on this, Nouriel Roubini, chairman of New York-based economic and financial analysis firm RGE Monitor, said the dollar carry trade is larger than before.
Cautious: Roubini says the asset bubble is going to become bigger globally and the bigger the bubble, the bigger the crash. Jin Lee / Bloomberg
The carry trade is a popular trading strategy used in the foreign exchange market where investors borrow in the currency of a country where interest rates are low and lend the proceeds in the currency of a country where interest rates are higher in hopes of profiting from the difference.
“Everyone is buying dollar at almost zero rate,” Roubini said in an interview, adding that this could lead to a unravelling of this carry trade. Edited excerpts:
You were with us a couple of weeks ago and we talked about this giant carry trade and fears of a new bubble as cash pours in. Are you seeing any turn in that trade?
My view is that this carry trade is actually becoming larger than before. The US has zero interest rates, (and) the Fed is expected to keep rates at zero for the foreseeable future.
So everybody is borrowing in dollar, the dollar is weakening, you can borrow at zero rates. Given the dollar weakening, you are actually borrowing at significantly negative rates of minus 15-20%, given how much dollar has fallen.
The traditional carry trade was just buying high-yielding currencies and assets like in Turkey, in Australia, in Brazil, where interest rates are higher. But now you can do the same carry trade in oil, energy commodities, in global equities, in credit, in almost every risky asset class.
This asset bubble we have seen since March, where asset prices have gone up globally across the board in a perfectly correlated way by 60% or 100% in emerging markets, is explained by this huge massive mother-of-all carry trades where the US dollar has become the funding currency for them.
Does the fact that the dollar is at or close to its one-month high change your view in anyway? Is there no way that the dollar could suddenly revalue up and pop or at least deflate some of this bubble?
The dollar moves trend-wise down and has been falling since March significantly. There has been a slight correction of the dollar upward but that is minor. My concern is that this carry trade is going to continue for a while because as long as the Fed is on hold, expect to stay on hold, and as long as the Fed keeps volatility on the long end of the yield curve low, then volatility is low and it is safe to take these carry bets and do it more and more again.