With the Western world moving to quantitative easing and a near 0% interest rate environment, experts agree that interest rate differentials are no longer the significant driver of forex markets as they were in the past.
Adam Boyton, G10 FX Strategist for Deutsche Bank, discussed this along with other factors driving forex markets on a conference call Tuesday afternoon.
Among Boyton’s observations was that equity markets have priced in too much of a recovery, despite pressure the dollar will remain the preeminent reserve currency for at least another five years and that interest rate differentials will no long be a primary driver of forex markets. “[The market] will look at interest rate differentials, but not as much as before,” Boyton said.
This concurred with comments made by Jamie Charles during taping of the Futures I-Trade Show trader profile to be aired tomorrow at noon CDT. Charles, CEO and portfolio manager of Greenwave Capital Management, discusses some of the changing dynamics in forex markets, stating that with the all the major currencies having an interest rate of 1% or below, interest rate differential will take a back seat to other fundamental factors.
While Boyton states that the traditional carry trade as we know it is largely dead, there is an opportunity to profit from a new carry trade going long the Brazilian real and using traditional higher yielding commodity currencies like the Australian dollar, New Zealand dollar and Canadian dollar as the funding currency.
The reason commodity currency pairs like the BRL/AUD, BRL/NZD, and BRL/CAD, are a better option for carry trades is they have a low correlation to equity markets. Using Japanese yen or the U.S. dollar as a funding currency means a higher correlation to equities according to Boyton.
Very good information about the carry trade.
Will China have an impact on the commodity currency pairs, especially AUD?