1 carry trade and regions heiner flassbeck director division on globalization and development...
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3 YEN-CARRY TRADE ON THE ICELANDIC KRONA, US DOLLAR AND TURKEY LIRA,TRANSCRIPT
1
CARRY TRADE AND REGIONSHEINER FLASSBECK
DirectorDivision on Globalization
and Development Strategies
2007
2
Uncovered interest returnNominal exchange-rate changeInterest rate differential
YEN-CARRY TRADE ON THE ICELANDIC KRONA, US DOLLAR AND BRAZILIAN REAL, 2005-2007
Krona
-10-8-6-4-202468
1012
1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5
2005 2006 2007
Per
cen
t
Dollar
-10-8-6-4-202468
1012
1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5
2005 2006 2007
Per
cen
t
Real
-10-8-6-4-202468
1012
1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5
2005 2006 2007
Per
cen
t
Note: A positive change in the exchange rate means an appreciation of the corresponding currency vis-à-vis the yen.
3
YEN-CARRY TRADE ON THE ICELANDIC KRONA, US DOLLAR AND TURKEY LIRA, 2005-2007
Krona
-10-8-6-4-202468
1012
1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5
2005 2006 2007
Per
cen
t
Dollar
-10-8-6-4-202468
1012
1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5
2005 2006 2007
Per
cen
t
Turkey New Lira
-10-8-6-4-202468
1012
1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5
2005 2006 2007
Per
cen
t
Hungarian Forint
-10-8-6-4-202468
1012
1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5
2005 2006 2007
Per
cen
t
4
CARRY TRADE AND REGIONS
HEINER FLASSBECK Director
Division on Globalization and Development Strategies
2010
5
CARRY TRADE OPPORTUNITIES OF THE ICELANDIC KRONA VIS-À-VIS THE DOLLAR, 2005–FEBRUARY 2010
-10-8-6-4-202468
10
1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1
2005 2006 2007 2008 2009 2010
Per
cen
t
Uncovered interest return Interest rate differentialNominal exchange-rate change
6
CARRY TRADE OPPORTUNITIES OF SELECTED CURRENCIES VIS-À-VIS THE DOLLAR, 2005–FEBRUARY 2010
Uncovered interest returnNominal exchange-rate changeInterest rate differential
Icelandic krona
-10-8-6-4-202468
10
1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1
2005 2006 2007 2008 2009 2010
Per
cen
t
Hungarian forint
-10-8-6-4-202468
10
1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1
2005 2006 2007 2008 2009 2010
Per
cen
t
Brazilian real
-10-8-6-4-202468
10
1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1
2005 2006 2007 2008 2009 2010
Per
cen
t
Bulgarian lev
-5-4-3-2-1012345
1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1
2005 2006 2007 2008 2009 2010
Per
cen
t
7
UNCOVERED INTEREST RETURNS, EXCHANGE-RATE CHANGES, INFLATION AND INTEREST RATE
DIFFERENTIALS, 1995-2010
ICELAND
-10
-8
-6
-4
-2
0
2
4
6
8
10
1995 1998 2001 2004 2007 2010
Per
cen
t
60
70
80
90
100
110
120
130
140
Inde
x nu
mbe
rs, 2
000
= 10
0
Real exchange-rate change Inflation rate differentialReal exchange-rate trend (right scale)
-20
-15
-10
-5
0
5
10
15
20
1995 1998 2001 2004 2007 2010
Per
cen
t
Uncovered interest returnInterest rate differentialNominal exchange-rate change
8
UNCOVERED INTEREST RETURNS, EXCHANGE-RATE CHANGES, INFLATION AND INTEREST RATE
DIFFERENTIALS, 1995-2010
BRAZIL
-10
-8
-6
-4
-2
0
2
4
6
8
10
1995 1998 2001 2004 2007 2010
Per
cen
t
60
70
80
90
100
110
120
130
140
150
160
Inde
x nu
mbe
rs, 2
000
= 10
0
Real exchange-rate change Inflation rate differentialReal exchange rate trend (right scale)
-20
-15
-10
-5
0
5
10
15
20
1995 1998 2001 2004 2007 2010
Per
cen
t
Uncovered interest returnNominal exchange-rate changeInterest rate differential
9
UNCOVERED INTEREST RETURNS, EXCHANGE-RATE CHANGES, INFLATION AND INTEREST RATE
DIFFERENTIALS, 1995-2010
TURKEY
-10
-8
-6
-4
-2
0
2
4
6
8
10
1995 1998 2001 2004 2007 2010
Per
cen
t
60
80
100
120
140
160
180
Inde
x nu
mbe
rs, 2
000
= 10
0
Real exchange-rate change Inflation rate differentialReal exchange rate trend (right scale)
-20
-15
-10
-5
0
5
10
15
20
1995 1998 2001 2004 2007 2010
Per
cen
t
Uncovered interest returnNominal exchange-rate changeInterest rate differential
10
UNCOVERED INTEREST RETURNS, EXCHANGE-RATE CHANGES, INFLATION AND INTEREST RATE
DIFFERENTIALS, 1995-2010
CHINA
-10
-8
-6
-4
-2
0
2
4
6
8
10
1995 1998 2001 2004 2007 2010
Per
cen
t
60
70
80
90
100
110
120
130
140
Inde
x nu
mbe
rs, 2
000
= 10
0
Real exchange-rate change Inflation rate differentialReal exchange-rate trend (right scale)
-20
-15
-10
-5
0
5
10
15
20
1995 1998 2001 2004 2007 2010
Per
cen
t
Uncovered interest returnInterest rate differentialNominal exchange-rate change
The way out:
• 1. Get interest rates down• 2. Contain inflation by incomes policy• 3. Keep the value of the Krona low• 4. Preserve the current account surplus by all means• 5. Stimulate the domestic economy by expansionary monetary
policy including by direct financing of government investment• 6. Try to find an agreement with foreign creditors to repay the
debt over very long periods (30 to 40 years) and explain to them that Iceland needs current account surpluses for this time and growth to be able to service its debt
11
12
Nominal unit labour costs1 in Germany and
other EMU-member countries2 since 1999
100
105
110
115
120
1999 2000 2001 2002 2003 2004 2005 2006
Inde
x nu
mbe
rs, 1
999
= 10
0
Germany
Source: AMECO data base from April 2006; calculations by the author; data for 2006 are forecasts by the EU commission.1 Total economy, national currency. - 2 EMU without Germany.
EMU without Germany
Italy
Inflation target
13
UNCOVERED INTEREST RETURNS, EXCHANGE-RATE CHANGES, INFLATION AND INTEREST RATE
DIFFERENTIALS, 1996-2006
EASTERN EUROPEEastern-European Countries
-10
-5
0
5
10
1996M3 1997M11 1999M7 2001M3 2002M11 2004M7 2006M30
20
40
60
80
100
120
140
160
180
200
Real exchange-rate changeInflation rate differentialReal exchange-rate trend (right scale)
Eastern European Countries
-10
-8
-6
-4
-2
0
2
4
6
8
10
1996M3 1997M11 1999M7 2001M3 2002M11 2004M7 2006M3
Uncovered interest returnInterest rate differentialNominal exchange-rate change
Speculation opportunities, appreciation trend and volatility persist despite the reduction in interest
rates.
14
UNCOVERED INTEREST RETURNS, EXCHANGE-RATE CHANGES, INFLATION AND INTEREST RATE
DIFFERENTIALS, 1996-2006
ASIAAsia
-10
-8
-6
-4
-2
0
2
4
6
8
10
1996M3 1997M11 1999M7 2001M3 2002M11 2004M7 2006M360
70
80
90
100
110
120
130
140
Real exchange-rate changeInflation rate differentialReal exchange-rate trend (right scale)
Asia
-10
-5
0
5
10
1996M3 1997M11 1999M7 2001M3 2002M11 2004M7 2006M3
Uncovered interest returnInterest rate differentialNominal exchange-rate change
Little speculation opportunities, moderate average appreciation and volatility.