The last seven days has been a glaring example of fallout from the cross-border carry trade. That’s the sort of trade, well known in currency markets, where investors borrow funds in low-rate countries and invest them in higher-rate ones. Some $4 trillion is estimated to have flooded into emerging markets since the 2008 financial crisis to profit off the ultra accommodate policies of the U.S. Federal Reserve, Bank of Japan, European Central Bank and the Bank of England. Now that central banks in developed economies are looking to reverse course and eventually raise rates, that carry trade is unraveling fast, resulting in the brutal sell-off in emerging markets such as Turkey and Argentina over the last week.
With all signs showing the Canadian economic miracle is fading, the Bank of Canada is understandably starting to sound more dovish. The Canadian dollar has got a whiff of that, down about 10 percent from where it was this time last year.
U.S. and German government bonds came under selling pressure on Thursday, one day after the Federal Reserve announced it will start trimming its monthly asset purchases by $10 billion to $75 billion. The move was much anticipated but was also historically significant – it is the first step towards unwinding the abundant monetary stimulus that helped keep the financial system afloat during years of crises.
from Rahul Karunakar:
You should taper in December and regain lost face.
A growing but vocal minority of economists
Even if the latest Reuters poll consensus still shows the Federal Reserve will wait until March before trimming its monthly bond purchases, the clamor to do that in December - or rather later today - is rising.
When the U.S. Federal Reserve launched its third round of quantitative easing, or QE3, it was hailed as an “open-ended” policy that would last as long as needed. Most important for investors, the pace of the bond buying – which started at a somewhat arbitrary $85 billion per month – would be “data dependent.” Especially throughout the spring, officials stressed they were serious about adjusting the dial on QE3 depending on changes in the labor market and broader economy. But as the unemployment rate dropped to 7.3 percent last month from 8.1 percent when the program was launched in September, 2012, the bond-buying has effectively been on auto-pilot for 14 straight months.