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Carry Trade Nirvana Stymies Central Banks as Aussie Jumps

Policy makers in Australia, New Zealand and Japan face the threat that the $5.3 trillion a day global foreign exchange market will derail their efforts to deliver sustainable economic growth.

Central bank chiefs Glenn Stevens, Graeme Wheeler and Haruhiko Kuroda are struggling to rein in surging demand for their nations’ assets as their currencies climbed this week with investors focused on falling volatility and Japanese stocks. The kiwi and Aussie led gains among 31 major peers since June 6 while the yen is poised for its strongest week since early April. One-month implied volatility for Australia’s dollar slid its lowest level since 1996 yesterday, prompting traders to ignore this year’s 32 percent drop in prices for iron ore, the nation’s biggest export.

“As volatility moves lower, it’s really hard to fight the attraction of the Aussie and kiwi as carry trade currencies,” said Ray Attrill, the global co-head of currency strategy at National Australia Bank Ltd. in Sydney. “With the RBA clearly going no where for a long time to come, whenever volatility falls the carry attraction of the Aussie increases, which seems to be overriding every other factor at the moment.”

In carry trades, investors buy high-yielding assets using money from nations with lower interest rates. A drop in the funding currency or a rise in the target exchange rate adds to the return from the interest-rate differential. Lower volatility lessens the chances the trade gets upended by sharp swings in exchange rates.

The Aussie and kiwi have returned 2 percent on a risk-adjusted basis this year, the best performance after Brazil’s real among the 16 most-traded currencies.

RBNZ Disconnect

New Zealand’s central bank Governor Wheeler said yesterday that current levels of the local dollar were unsustainable and the central bank expected it to adjust in line with weaker commodity prices. That echoed his Australian counterpart, Glenn Stevens, who signaled June 3 a disconnect between the Aussie and falling resource prices. The Bank of Japan today maintained record stimulus as Governor Kuroda strives to boost inflation that remains short of a 2 percent target.

Australia’s dollar traded at 94.17 U.S. cents as of 2:20 p.m. in Sydney today, set for a 0.9 percent advance on the week. It touched a two-month high of 94.38 yesterday. New Zealand’s currency fetched 86.66 U.S. cents, set for a 1.9 percent jump, the most since the period ended Feb. 7. The yen changed hands at 101.86 per dollar and gained 0.6 percent.

Implied volatility for the Aussie over a month fell to 5.58 percent yesterday. For the kiwi, it dropped to 6.38 percent, the lowest on record in data going back to 1997.

Yen gains have come along with falling Japanese stocks and declines in U.S. yields from recent highs, said Attrill.

The Nikkei-225 Stock Average dropped 0.7 percent this week, its first decline in a month.

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