In this video blog Udi Sela, Vice President of the Numerix Client Solutions Group and Numerix CMO Jim Jockle sit down to discuss the recent FX news in which renowned currency specialist and Global Head of G10 FX Strategy at Citi, Steven Englander, argued that “every major FX trade in place right now is really a carry trade in one form or another.”
In his analysis of this statement, Udi breaks down the dynamics of a typical carry trade and discusses the dramatic movements in the foreign exchange market, in particular amongst the G3—dollar, euro, and yen. He also provides insights into the economic forces behind the four trade types the market has been buzzing about, and why these trades make sense right now. In addition, Jim and Udi conclude by exploring how the significant unrest in the Middle East has been impacting the current FX market, most specifically in regards to non-deliverable forward (NDF) contracts.
Jim Jockle (Host): Is every FX trade a carry trade? Welcome to Numerix Video Blog I’m your host Jim Jockle. Joining me today is FX specialist Udi Sela. Udi, how are you?
Udi Sela (Guest): Thank you. Very well, yourself?
Jockle: Very good, thank you. We want to sit back, in recent news, on September 6th, currency specialist and Global Head of G10 FX strategy at Citi, Steven Englander, recently argued that “every major FX trade in place right now is really a carry trade, in one form or another. Different only in scope and the risk it entails.”
So, in your experience, well first of all why don’t you give us a little background as it relates to the carry trade and the strategy that investors would utilize that, but then really what does this statement mean exactly, and do you agree with Mr. Englander?
Sela: Yeah, definitely. So in terms of carry trade basically, the idea is that you purchase a currency which offers a higher yield and you sell the other currency which actually trades at the lower yield. And what Steve Englander is trying to say, and I actually had the pleasure of meeting him, and working with him, is that we have now basically two types of economies in terms of economic cycle.
So we have economies that seemed to be getting out of the woods, with growth, and economies that really are just still fighting the deflation and trying to take extreme measures. So, when I’m mentioning measures and cycles, let’s have a look at the U.S. economy. Where the QA has been on for a while and now just this week again the Federal Reserve Bank has announced that they will reduce further the purchases and continue the tapering, as opposed to for instance to the European Central Bank which really announced a very aggressive plan this July.