South Africa: Big Pick-Up in the Carry Trade


analysis

Hallelujah! The carry trade is back. Huge excitement. Small problem — nobody really knows where it is or how big it is. What we do know is that it’s definitely a good thing, and we should be very happy. Possibly.

One of the most important and simultaneously intangible aspects of the huge wash of money rushing around the world is the carry trade. At its most basic, it is an enormously simple, effective, and fast way of making money.

If that’s the case, then lots of people are doing it, right? You betcha. So why aren’t we all doing it? That, in fact, is a very good question.

The way the trade works is this: You borrow money on a vast scale in a developed country, and you invest in government debt in a developing country and pocket the difference in the interest rates. If you think that’s too simple, you would be right, because there are reasons why there is an interest rate differential. There are, in short, risks.

The first risk is that the interest rate differential will be wiped out by a decline in the currency of the country you invest in. For example, Turkey’s three-month deposit…

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Publish date : 2019-04-10 07:17:51

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