The Death of One Carry Trade Gives Way to Another

The Carry Trade is dead and alive all at the same time.

The Carry, which is the long-term strategy of “carrying” a high-yielding currency while borrowing another currency at a low interest rate, has been based for many years around borrowing the extremely weak JPY against commodities, emerging markets, and currencies such as the GBP, EUR, AUD, USD, etc.

After the global bubble popped, investors scrambled to sell back their assets and the JPY emerged as a breakout trade in itself. And with policy makers in Japan discussing the possibilities of raising the strength of their currency (inevitably meaning interest rates), the JPY-quoted carry trade is all but finished.

But, while one carry trade falls, another one rises. Much has been made on this website and many others about the unavoidable weakening of the USD. With government and Fed-influenced inflation right around the corner, the Dollar is losing ground to stronger currencies at a never-before seen pace–much like the Yen carry trade of old.

With interest rates near or at zero and no sign of a change in sight, expect to see a carry-like move in the AUD (3.0% interest rate) and NZD (2.5%) and other currencies for the foreseeable future. This also may become even more prominent if we see other central banks raise their already higher rates while the US Fed remains neutral.

Can there be exceptions? Of course. With risk aversion having the potential to build, another sell-off in equity markets could send assets back to the USD in a “flight to safety” or de-leveraging play.

However, long term, new lows in the Dollar seem unavoidable and the carry trade lives yet again.

Watch: Peter Schiff, Senate candidate and President of Euro Pacific Capital, and Brian Dolan of Forex.com joined Squawk on the Street on CNBC this morning to discuss the USD carry trade.