Forex Video : the USD as the carry trade funding currency

Today on CNBC Peter Rosenstreich talks about the USD as the carry trade funding currency

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Interview with Peter Rosenstreich

Steve Sedgwick
Right, let's take a look at the foreign exchange markets now. The dollar finding a little bit more form as
some of the risk appetite just slightly came off the table, didn't it? The dollar trading versus Japanese
currency - 91.18. Euro-dollar trading 147.16. Cable 163.80. Let's speak to Peter A. Rosenstreich, who's
the Chief Market Analyst at Advanced Currency Markets, and joins us now. Very good to see you today,
Peter. In terms of the dollar, what's your outlook from here?

Peter Rosenstreich
Well, you know, in the short term, the ultra short term, I mean today we're looking for some level of dollar
strength and that's basically driven by a sort of a correction, a slight term correction. Or in the equity
markets we're expecting it's been a fantastic few weeks in the S & P and European borsts. We think that's
gonna pull back. We think the dollar's gonna gain on the back of that movement.

Steve Sedgwick
Given the fact that no one's expecting any interest rates to move to the up side in the major currencies in
the short to medium term, it just seems that everyone's looking at the funding story, everyone's looking at
the risk story. Is there something everyone's missing though because it just seems that currencies such
as the yen, the dollar, they're being used to fund a lot more risk trades being put on the market? But is
there anything more inventive out there we should be looking at?

Peter Rosenstreich
Well I think you've got a good point, you know. Before 2007 most people had never even heard of the
Carry trade and now they can't wait to put it on and you hear all the media talking about it very quickly.
There are portions of where we are today, especially in the dollar that's reminiscent of 2001 and what was
going on in Japan ie making it a very good set up for the Carry trade. That said, the characteristics of a
Carry trade often have a steady appreciation, then with some sharp sort of massive draw-downs. And the
question is, what could cause those draw-downs. And I think clearly the Fed stepping in maybe with not a
surprise but a sort of unexpected exit strategy or a move towards pulling out liquidity, that will give the
dollar a significant boost in a very rapid time. And that's what I think the market is really underappreciating
at this moment.

Steve Sedgwick
Yeah, I agree as well and I can't help thinking that one day all this good American data, let's face it most
of the data is slightly better than we've seen previously, is gonna mean that people will start thinking
about interest rates again. And when they do, it's gonna be vicious. But what piece of data do you think
it's gonna be? Maybe unemployment numbers, I don't know, even though it's supposed to be lagging.

Peter Rosenstreich
Yeah, absolutely. I think you hit on two very good points. One is that it's gonna be vicious when it occurs
and I think the euphoria that's caught up around the Carry trade and selling dollar and the funding rate
LIBOR switch between the yen going above the US in terms of funding, has all caught the market
imagination and I think it's gonna catch many traders off guard. What can actually be the sort of impetus
for the Fed to look to start exit strategy? I think labour numbers are exactly what they wanna see. There
has to be improvement in that market. With that, with an improved labour market, even though it's a
laggard, we'll see consumer appetite, we'll see spending come back. That's really what we're looking for
as the turnaround point. And when it does happen, if you're very, very long excuse me - a very, very short
dollar, I think you have to be very cautious.

Steve Sedgwick
I'm very interested to see the Japanese and the Chinese both actually buying more dollars net last week
despite people fearing about the diversification. Peter, we've gotta leave it there. Have a good weekend.
Thank you very much for joining us today.

Peter Rosenstreich
You too.

Steve Sedgwick
Peter A. Rosenstreich, Chief Market Analyst at Advanced Currency Markets.

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