Brave New World

BNP cautions against premature carry trade talk 20/05/2009

According to BNP Paribas

1) Banks’ balance sheet de-leveraging due to frozen money markets. Non-US banks held a $10trn USD-denominated funding position – the globe’s biggest carry trade. Reduction of USD-denominated liabilities by non-US banks created USD demand.

2) EM FX volatility surpassed that of G10.

3) Pressure for Asian currency appreciation blew Bretton Woods II to pieces. What’s in store for 2009? Sharp deleverages historically imply a very prolonged period of underperformance. Hence, do not expect carry trades to return quickly