FX carry trade didn’t work in 2015

CNBC analysts were discussing yesterday another disappointing a year for the FX carry trade. In the case 2015, the currency carry trade, which attempts to profit from global differences among interest rates, saw its worst year since the 2008 financial crisis, according to Deutsche Bank.

In 2015, traditional carry trades got hit, as higher interest rate currencies like the Aussie and New Zealand dollar got crushed against a strong U.S. Dollar and interest rates drifted to new lows with little divergence.

“The complex was hit by a perfect storm of Fed tightening, Chinese policy shocks and idiosyncratic [emerging market] blowups,” Deutsche Bank currency strategist Oliver Harvey wrote in a note to clients this week.

A WSJ piece back in March noted that the Euro has become the new funding (sell) currency and money was making its way to India to try to capture the carry.

“Typically, you wouldn’t think of funding trades for rupees with euros,” Mr. Stein said. “You can think of it as an unconventional way to fund some of these Asian trades.”

A $10 million investment in the Indian rupee would generate $600,000 a year, Mr. Stein estimated, while negative interest rates in the eurozone would bring an additional $40,000 by betting against the euro. But movements in exchange rates of either currency could boost or pare gains on the trade, or even lead to losses.

A generic example of how the carry trade works (Courtesy: BabyPips).

Long AUD/JPY Carry Trade

If you buy AUD/JPY and held it for a year, you earn a “positive carry” of +4.40%.

Of course, if you sell AUD/JPY, it works the opposite way:

Short AUD/JPY Carry Trade

If you sold AUD/JPY and held it for a year, you would earn a “negative carry” of -4.40%.

CNBC noted a silver lining, that even though the carry strategy lost investors 29 percent in 2008, it made them 23 percent in 2009. Could a down 2015 cause a bounce back in the carry trade benchmark? For 2016, “a carry positive outcome would probably have to include an arrest to China’s slump next year and the commodity cycle finding a floor,” Mr. Harvey wrote.

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