by Phoenix Capital Research on 01/23/2015
The US Dollar rally, combined with the ECB’s policies are at risk of blowing up a $9 trillion carry trade.
When the Fed cut interest rates to zero in 2008, it flooded the system with US Dollars. …
Simply put, the US Government was practically giving money away and the world took notice, borrowing Dollars at a record pace. Today, the global carry trade (meaning money borrowed in US Dollars and invested in other assets) stands at over $9 TRILLION (larger than the economy of France and Brazil combined).
This worked while the US Dollar was holding steady. But in the summer of last year (2014), the US Dollar began to breakout of a multi-year wedge pattern … . The minute the US Dollar began to rally aggressively, the global US Dollar carry trade began to blow up (because borrowers would have to pay back more expensive dollars than they had borrowed and the cost of carrying their debt would go up for them). It is not coincidental that oil commodities, and emerging market stocks took a dive almost immediately after this process began. …
This process is not over, not by a long shot. … When carry trades blow up, the volatility can be EXTREME. …
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