Worst Carry Trades Show Central Banks at Stimulus Limit

Worst Carry Trades Show Central Banks at Stimulus Limit

The $4 trillion-a-day foreign- exchange market is losing confidence in central banks’ abilities to boost a struggling world economy.
Rather than sparking bets on growth, the JPMorgan Chase & Co. G7 Volatility Index, which more than doubled in 2007 to 2008 before policy makers employed extraordinary measures to address faltering global expansion, has dropped to a five-year low. While small foreign-exchange swings historically favor the strategy of borrowing in low-yielding currencies to buy those with higher returns, a UBS AG index that tracks profits from the so-called carry trade has fallen to the lowest level since 2011.
Enlarge image
The gauge has fallen 4.8 percent from a level of 450.15 on Aug. 9, before the Federal Reserve said it would buy $40 billion of mortgage debt a month until it sees improvement in the economy, the European Central Bank said it would buy bonds of indebted members that ask for aid and the Bank of Japan boosted its asset-purchase fund to 55 trillion yen ($693.4 billion). Photographer: Andrew Harrer/Bloomberg
4:40
Oct. 22 (Bloomberg) -- Elsa Lignos, a senior currency strategist at Royal Bank of Canada, talks about her foreign-exchange strategy. She speaks from London with Francine Lacqua on Bloomberg Television's "The Pulse." (Source: Bloomberg)
“At this stage it may feel frustrating, but waiting is not a bad strategy,” Mauricio Bouabci, a London-based currency fund manager at Pareto Investment Management Ltd., which oversees $45 billion, said in an Oct. 17 telephone interview. It would take increased volatility to tempt him back into the market, he said.
Foreign-exchange speculation is declining as mandated spending cuts and tax increases in the U.S. next year, concern that European government leaders aren’t moving fast enough to fix the region’s debt crisis, and slowing growth in emerging economies from China to Brazil weigh on sentiment. The world economy will expand 3.3 percent this year, the least since the 2009 recession, the International Monetary Fund said on Oct. 9.