Guys,
This is a topic near and dear to my heart which I don't think has been getting enough attention here and warrants some discussion. I'm not an expert so I hope the likes of Token Funder and others with more knowledge of this space can help shed some light on likely implications of the current state of play.
To kick things off, here's a nice article which talks to some of the issues:
http://www.ibtimes.com/articles/20090923/yield-curves-fx-libor-trends.htm
Here's another nice article covering LIBOR's trajectory:
Key lending rate sinks to record low
So we have a 3 month LIBOR at almost zero, yet long dated rates much higher due to all the quant easing going on. My initial question is how long is this sustainable for? History suggests the 10-2 spread tops out at 2.7% so we might be near a tipping point, but the author goes on to suggest there's more QE coming and we might see the 10 rate edge higher still. Even a mention of $1200 gold by year end as an obvious inflation hedge.
My second question is around the implications of the new USD carry trade that has been mentioned by a few commentators. If traders are borrowing USD and investing in the AUD, then what will be the implication of all that money flowing onto our shores. And what is the risk to the AUD FX Rate if the RBA does start rising our cash rate even further and creating an even better carry trade option for those inclined. I see a lot of cash already flowing our way with more to come if our economy remains robust and the RBA starts hiking.
So, more cash in our banks? More lending? Asset bubbles? AUD at USD parity or beyond?
I'll bow out and defer to the Forex experts to help enlighten us ill informed masses...
Thanks in advance,
Michael
This is a topic near and dear to my heart which I don't think has been getting enough attention here and warrants some discussion. I'm not an expert so I hope the likes of Token Funder and others with more knowledge of this space can help shed some light on likely implications of the current state of play.
To kick things off, here's a nice article which talks to some of the issues:
http://www.ibtimes.com/articles/20090923/yield-curves-fx-libor-trends.htm
ibtimes said:While FX trading seems to become increasingly bifurcated (broad USD weakness & broad JPY strength or vice versa), the unfolding trend remains a concerted move away from the QE currencies (USD, GBP) and into the commodity/high yielders as well as the EUR. Emerging talk on whether the US dollar has become the new low-yielding vehicle for carry trades financing equities, commodities and currencies vehicle highlights the difference between the USD and JPY carry trades.
ibtimes said:Yield Curve Steepening and Dollar Flattening
The chart below shows the US yield curve (as measured by the 10-2 spread) has peaked out at 2.60-2.70% in each of the last easing cycles (1991 & 2001 recessions). Thus, each time the 10-2 spread neared 2.70%, the FOMC was at the end of its easing cycle. This time, the two main forces that could help the current steeping exceed the highs of 1992 and 2003 are soaring US govt debt and secular decline in the US dollar.
Here's another nice article covering LIBOR's trajectory:
Key lending rate sinks to record low
CNN Money said:NEW YORK (CNNMoney.com) -- A key bank-to-bank lending rate fell to its lowest point on record Wednesday, signaling continued easing of the once-frozen credit markets.
Three-month Libor fell below 0.30% (0.269869%) for the first time since the British Bankers' Association started keeping records in 1986. That's a far cry from where rates sat just one year ago, when the 3-month rate peaked above 4.8% on Oct. 10.
So we have a 3 month LIBOR at almost zero, yet long dated rates much higher due to all the quant easing going on. My initial question is how long is this sustainable for? History suggests the 10-2 spread tops out at 2.7% so we might be near a tipping point, but the author goes on to suggest there's more QE coming and we might see the 10 rate edge higher still. Even a mention of $1200 gold by year end as an obvious inflation hedge.
My second question is around the implications of the new USD carry trade that has been mentioned by a few commentators. If traders are borrowing USD and investing in the AUD, then what will be the implication of all that money flowing onto our shores. And what is the risk to the AUD FX Rate if the RBA does start rising our cash rate even further and creating an even better carry trade option for those inclined. I see a lot of cash already flowing our way with more to come if our economy remains robust and the RBA starts hiking.
So, more cash in our banks? More lending? Asset bubbles? AUD at USD parity or beyond?
I'll bow out and defer to the Forex experts to help enlighten us ill informed masses...
Thanks in advance,
Michael
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