The Great US$ 9 Trillion Carry Trade Update,

Asian Currencies Falling Hard by IPM Group

Posted 17th August 2015

 

Read our disclaimer at the end of this article.


I wrote about the great carry trade on the 15th March 2015 (on this forum)  9 Trillion US$ Carry Trade That May Take The World Economy Down, What is it exactly? You need to understand this very clearly and how it affects our global economy and your own savings and financial well being !

I made very clear warnings at that time that this carry trade would unwind at some point, but the facts at the time of writing demonstrated that the unwinding of US$ debt (carry trade) was already underway. As this unwind continues it feeds on itself quite rapidily and the volatility becomes ever more violent.

For example let us look at US$ ag Myr - Malaysian currency


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Now many market pundits will state that this is down to a number of factors including the low oil price (Malaysia is an oil exporter), the corruption and insolvency of the Malaysian Sovereign Wealth Fund, the 'secret donation' of US$ 700 mio into the Malaysian prime minister own personal bank account or the expected increase in US$ interest rates.Without doubt this is all ammunition for a weakening economy and currency  -  but not the root cause !

Malaysia has borrowed heavily in US$ since 2010 (carry trade) and the higher the US$ rallies the worse it gets. We at IPM Group expect to see 4.50 to 5.00 (US$ ag MYR - further declines in MYR of 15 to 20% ) over the next 12 months.


But this is not just Malaysia  -  Asia and all emerging currencies are affected....

As you can see below in the ADXY (below) which is an Asian currencies trade and liquidity weighted index ag the US$  -  see a trend in place here ?

Over 8% fall in the last 12 months  - but this a trade weighted index and does not give a clear picture, so let us look at the Sing$

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US$ ag Sing$, below....

1.25 to 1.41 in the last 12 months (devaluation of the Sing$ -13%), or a move from 1.31 to 1.41 in less than 4 months ( - 7.5% )

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As I have said this effects the whole emerging markets, Asia and Middle East  - the great 9 Trillion US$ carry trade unwind has a ways to go yet  - expect to see much more volatility and much weaker currencies against the US$ in the year ahead !!


 

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