A currency carry trade is a strategy that involves borrowing from a low interest rate currency and to fund purchasing a currency that provides a rate. A trader using this strategy attempts to capture the difference between the rates, which can be substantial depending on the amount of leverage used.
USD Index on 4 Feb 2022 was 95.48 and it has gone up by 8.11% in just
about 3 months. The USD index measures the dollar value against the euro,
Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.
Singapore dollar has weakened against USD relatively lesser within the same
period due to the MAS' stance in deliberately appreciating the Singapore
currency to combat inflation.
This is a double whammy to those speculators who did a USD
carry trade 3 months ago. They stand to lose more from the strengthening of USD
than from the surge in interest rates. And the loss will be more if there is leverage.
Look at the gradient of both charts from 4 Feb till now, the speed of surge is
just too fast for them and all stock markets in the world to swallow.
This also explains why USD is flowing back to the US due to the fear
and this is only the start. Those countries who are slower in raising interest
rates will have more exodus of funds to the US.
Both stock markets and property markets will bear the brunt. I estimate that Nasdaq can go down to 6094 in this impending market crash.
I estimate Singapore Property Index will be down by 30% from
now to 2024. This is almost certain that it will come if history is anything to
go by. Singapore Government cannot help as the whole world will suffer when the
US government and the Fed raise interest rates. The Fed has to do it so as to
purchase back the old bonds at a great discount to the prices they sold to
sovereignty funds and rich investors. In so doing, they can reduce their debts
and the money they make through this interest-rates-hike exercise can be used
to support the US economy again.
What about other countries like Singapore? Too bad, they can
no longer print money to prop up their economy like what they did during the
initial Covid-19 pandemic stage from mid-2020 to end 2021 now that the US stops
printing USD or their countries will have even higher inflation and more exodus
of funds. Jacking up interest rates at a speed comparable to that of Fed's action is the way
forward to prevent exodus of funds.
Fasten your seatbelts, spend less and save more to buy the dip.
Prescientsuperphang
http://superphang.blogspot.sg
