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Carry on trading

What a week. The market was enlivened by talk of a devaluation in Latvia, a report claiming that end of the dollar was nigh and plenty of jawboning from central bankers and government officials in Istanbul. I often wonder if those in charge of FX rate management would be better off standing on their hands and talking out of their nether regions. It is a question I have sometimes asked. Obviously, nobody has replied.

However, when history looks back on this week, it will likely see that the most significant event was the decision by the Reserve Bank of Australia to raise its key rate by 25 basis points to 3.25%, making it the first G20 central bank to raise rates. That, inevitably, prompted speculation that the global rate-cutting cycle is at an end. Whether or not this proves true, the swift appreciation of the AUD suggests we may well be about to see the carry trade return to favour.

JPMorgan, for one, is not yet convinced. “Heady gains in high-yield currencies this year inevitably stir suspicions that longs in carry and shorts in the dollar must be extreme,” the bank wrote in some recent research.

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