Geoff Cutmore - Morning Thoughts

Carry on up the Carry Trade

With apologies to Joan Sims and Sid James. I wish the line was originally mine, but Jeremy Stretch, our currency analyst from Rabobank, should get the credit for the allusion this morning to the Pinewood comedies of the 1960s.

More than a little humor has been expended on trading desks at the machinations of the Bank of Japan and the Ministry of Finance. Questions asked about how the voting committee could move from a 6-3 vote against raising rates to an 8-1 vote in favor in successive meetings.

Have the underlying economic conditions in Japan changed so dramatically?

The biggest reaction came with the leak ahead of the official announcement that the benchmark rate would be going up 25 basis points. The yen took between 50 to 100 basis points on the dollar, euro and pound.

It didn't take long though for the traders to decide that the move would do little to unwind the attractiveness of the carry into higher yielding currencies. Therefore, the moves began to reverse on the official announcement. The market also sees this step as removing the uncertainty over the pace and direction of Japanese rates. Neither, Seijiro Takeshita at Mizuho, Mr. Stretch at Rabo, or Marc Ostwald at Insinger de Beaufort see this hike as presaging a series of rate rises, and most likely there will be no further adjustment before the Japanese elections in April and July.

Guest Host Richard Wilson, Threadneedle Asset Managment, thinks, at the margin, it will temper enthusiasm for the risk trades in emerging markets like Vietnam. I think the jury may be out on that ... in this apparently low risk investment environment chasing yield has rewarded. So, carry on the carry trade!

In case you missed it, the stock we discussed was American Tower (mobile phone mast operator) He likes the free cash flow and has held it for 2 years. He says it will stay in the portfolio.