What Is the New Zealand Dollar Telling Us About Carry Trades?

September 4, 2007

Last month, we talked about how the New Zealand dollar can be used as a leading indicator for carry trades. As the posterchild of carry trades, the New Zealand dollar is oftentimes the first currency to turn. With that in mind, we examine today’s 1 percent or 100 pip drop in the New Zealand dollar (NZD/USD). Every single major currency rallied against the Japanese Yen with the EXCEPTION of the New Zealand dollar. What’s going on?

There was no economic data released and the Australian dollar did not fall as well. There could be some merger and acquisition flow but nothing has been announced. Therefore it is quite possible that the price action of the New Zealand dollar today is telling us something and that something is that risk appetite has not returned to the markets. Should the NZD/USD or NZD/JPY continue to fall, I would be particularly careful about going long carry.

Also its September and if you haven’t heard, September is usually the worst month of the year for US stocks. If you think that the Dow and carry trade relationship will continue to hold, then you would have to think that if seasonality takes hold of the equity market again, carry trades would continue to weaken.

Posted in Carry Trades, Dow, Forex News, Japanese Yen, New Zealand dollar, Stock Market, Uncategorized