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Risk-on carry trade back in global financial markets 

October 26, 2015

Anindya Banerjee, Financial Express

The old risk-on carry trade is back on in the global financial markets, long financial assets and short Euro and yen to fund that exposure. A mix of reflexive trades and actual carry funded exposure makes these assets so well correlated.

In such a trade, a leveraged trader would look to buy high momentum instruments in the stock market and/or credit market and fund that exposure by borrowing in Yen or Euro. With Euro and Yen under pressure and their interest rates not expected to inch up any time in the foreseeable future, a speculator would be more than happy to have his obligation in those two currencies. However, a downward pressure on Euro and Yen reverberates through the FX sphere, making US dollar stronger against most of the global currencies, not just the majors. A strong dollar caps the interest in hard assets, mainly commodities. We are already seeing oil prices diverge from the stock prices.

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