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#108: The Worlds Most Popular Carry Trade

#108: The Worlds Most Popular Carry Trade

micksonmatch
July 24, 2024

Pinned Note: Over the next week or so, my focus will be on advancing the web portal development, so these letters will be done quicker than usual. The depth of analysis, therefore, might not be up to my usual standard.

S2N Spotlight

I have to say that I was delighted to hear that the most popular carry trade is the Turkish Lira (did you get the pun ). Before I explain it in more detail, let us look at what has happened to the Turkish Lira over the last 30+ years. There is no other way of saying the currency has completely collapsed.

A carry trade means that you go short a currency that has a low interest rate, as that is what you are paying, and you go long the currency that has a high interest rate. That is the carry. The risk, of course, is that the currency that you are longing for collapses more than you can carry. Let us go through the numbers.

If you buy TRYUSD, you are long the Turkish Lira, earning 50%, and you are short the US dollar, paying -5.25% for a net carry of 44.75%. The question is whether Lira will drop by more than 44%. I can see the attraction of the trade, but I am not sure I have the appetite for the geopolitical risk associated with the currency. Having said that, I may still trade it.

S2N Observations

I have always felt that the best indicator of a recession and stock market drop is an increase in the unemployment rate. What I have done below is invert the y-axis of the unemployment rate so that it is visually easier to see the relationship. When unemployment increases, there is almost always a drop in the stock market. However, this time, it hasn’t really happened yet.

Against the backdrop of the current economic environment, I certainly see an increase in unemployment, and therefore, I believe the stock market is due for a major correction.