The dollar carry trade may be unfolding again

In a previous post I commented on the US stock market getting strongly correlated again with the euro, as a sign that the global carry trade was back in vogue. The recent steep drop in the euro (see graph below) may have something to do with a change in the trade.



The graph above shows how the volatility of the ratio SPX/XEU, after a brief respite, is growing again. The ratio is rapidly expanding against its upper Bollinger band.


On the other hand, if one takes a longer term perspective, such as the one illustrated in the graph above, the effect of this global trade in affecting the value of the US stock market has been unparalleled. Even during the bubble years the performance discrepancy between SPX in US dollars and SPX in euros was not so pronounced as in the past three years.

A similar decline has been undergoing in the Japanese Yen as well:


Similar SPX/XJY graphs are presented here for the sake of comparison with the euro.





Categories: stockmarket, currencies, correlation