Carry exists across all asset classes as compensation paid to speculators for assuming market risk.
We argue that, as in equities, bonds, and currency, the carry trade in commodities represents a persistent source of beta-like returns.
The currency war “truce” at the G20 meeting in February of this year has effectively placed political pressure on Japan to refrain from further depreciation of the yen. We investigate whether this has frozen USDJPY at its “fair value”. Although a naïve reading of PPP figures suggests that the outcome is reasonable, adjustment for productivity differentials suggests that the yen is now heavily overvalued versus the dollar, with attendant negative consequences for the Japanese economy.
Did safe haven flows drive an ever appreciating Swiss Franc in the run up to January 2015?
The data reveal that, on the contrary, a general lack of Swiss outflows and repatriation of foreign bonds bought by Swiss domestic investors, can explain much of the pressure on the Franc to appreciate.
Ultimately domestic investors created an insurmountable problem for the Swiss National Bank (SNB) in the run up to the removal of the peg.
The uncertainty associated with the outcome of the referendum on Britain’s EU membership is already affecting financial markets and the wider economy. By examining the pricing of derivatives, we can identify the price the market is putting on this uncertainty, and what movements in currency are expected between now and the referendum itself.
Growth outperformance matters in EM over the long run, but capital flows drive short run returns in the asset class. We believe there are complementarities between both.