You Do Not Get Moves Like This Unless Stuff is Hitting the Fan
by Phoenix Capital Research
ZeroHedge.com
01/26/2015
The world carry trade for US Dollars is over $9 trillion.
In today’s world of monetary insanity, investors seem to forget that $1 trillion is a staggering amount of money. So to put that $9 trillion carry trade into perspective, if it were a country instead of a carry trade, it would be roughly equal in size to the economy of China, the second largest economy in the world.
Suffice to say, we’re talking about a truly staggering amount of borrowed US Dollars that have been invested into other assets/ investments.
Carry trades only work if the currency you are borrowing in doesn’t rally. As soon as it does, your trade very quickly goes into the red.
This is particularly true if you’re talking about a corporation that has borrowed in US Dollars to fund projects in countries where sales are denominated in other currencies (Europe, Asia, etc.)
The reason for this is that many multi-nationals do not hedge their currency risk. So if, for instance, they are borrowing in US Dollars without a hedge to invest in Europe and the US Dollar rallies, their projects very quickly begin to lose their appeal… and a LOT of money.
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