As stock investors “play defense” by running back to dividend paying stocks, currency traders may run back to the “daily-interest bearing” carry trades.
Carry trades have been shunned for months now as stocks have fallen. They were both at lofty levels. I mean they really were in the “nose bleed” section they were so high (especially in light of the economic conditions).
Just as stock investors are picking up dividend paying stocks again as a defensive play, currency investors are starting to look at these beaten down “carry trades” again. The nice thing about them is that they pay DAILY interest unlike most dividend stocks that pay QUARTERLY interest.
So literally every day (even on weekends) you’re earning something by being a buyer of these carry trades.
Now the only problem with them in recent months was that they’d gotten way too high for their own good. However, now that some of them have wiped out a whole year’s worth of gains, they are starting to look attractive again.
I want to focus in on one economy which is the “king of the hill” when it comes to carry trades because it holds the title of the “largest interest earner among industrialized countries”.
That country is New Zealand. It’s not a huge economy. However, it does have “the wind to its back” right now. How so? It’s a huge commodity exporter. As you well know, commodities have been going through the roof lately. So New Zealand has been enjoying the ride.
This country exports things like dairy products (butter, cheese, etc.) and most recently, oil for instance. Well every knows what oil prices have been doing lately. That’s great for an oil exporter. Oil has been hovering between $100 and $112 lately.
This oil field just went into production this last July. So that will be a good boost to their economy.
Secondly, food inflation has gone up for the first time in over 30 years. This upturn (which I believe will be sustained for a long time) will benefit this dairy exporter.
As a HUGE added bonus right now, their central banker stated that they have very little sub-prime exposure in their economy. This is more than most major economies can say right now.
Another benefit to them is that some of their main customers are in Asia where economies have remained considerably stronger than the rest of the world. So they won’t be pulled down as much by the U.S. slow down as most of the world will.
There are other things that are poised to help their economy even further such as more government spending and personal tax cuts according to their central banker.
Inflation remains high in New Zealand (which is good for a country’s currency generally). This has been driven by the demand that China and Australia’s growing economies have had on New Zealand.
So since New Zealand’s dollar yields a whopping 8.25% right now there’s huge appeal to a country with such great economic prospects as well as high interest that can be earned.
In fact, their central banker has “hinted” in recent speeches that rates may need to remain high for quite some time to come (which would be good for the New Zealand dollar, also known as the Kiwi).
So with their economy (GDP) growing a full percentage point from the third quarter, the central banker is justified by keeping rates high. So don’t look for him to cut those nice rates anytime soon.
This will be great news for currency traders that like to collect daily interest on their position. You don’t mind waiting for your currency to appreciate in value when you know that you’re gaining something literally daily while you wait.
The next interest rate decision for New Zealand will come about on April 24th. So keep an eye out for his speech.
Just last month, central banker Bollard said “future moves in interest rates could take quite some time as we wait and watch”. So he was implying that rates would need to be high for a long time since the inflation rate is well above their “comfort zone”.
This will especially help buyers of the NZD/JPY (New Zealand vs. Japanese yen currency pair. For New Zealand’s interest rates are at 8.25% (which is what you’d be earning) and the yen is at 0.50% (which is what you’d be paying). So the difference that you’d get to keep is the 7.75% difference.
Remember in currencies, there’s leverage. So you can earn far more than this on your money because you can “put down little, to control a lot”. Plus this “annual interest” is collected on a daily basis.
Now that much of the sting has been taken out of the NZD/JPY pair (since it’s fallen to yearly lows), it will become more attractive to investors shortly.
.(Note: If your broker/market maker doesn’t trade in this pair, you can still benefit from the New Zealand trade by buying the NZD/USD (New Zealand vs. U.S. dollar) pair which everyone trades in. This would be the 2nd best selection since U.S. rates will be coming down more in the near term. So the interest rate differential will widen in the favor of the Kiwi dollar.