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US Dollar Carry Trades in the Era of “Cheap Money”

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  • Shehadeh, Ali
  • Erdős, Péter
  • Li, Youwei
  • Moore, Michael

Abstract

In this paper, we employ a unique dataset of actual US dollar (USD) forward positions against a number of currencies taken by so-called Commodity Trading Advisors (CTAs). We investigate to what extent these positions exhibit a pattern of USD carry trading or other patterns of currency trading over the recent period of the ultra-loose US monetary policy. Our analysis indeed shows that USD positions against emerging market currencies are characterised by a pattern of carry trading. That is, the USD, as the lower yielding currency, is associated with short positions. The payoff distributions of these positions, moreover, are found to have positive Sharpe ratios, negative skewness and high kurtosis. On the other hand, we find that USD positions against other advanced country currencies have a pattern completely opposite to carry trading which is in line with uncovered interest parity trading; that is, the lower (higher) yielding currency is associated with long (short) positions.

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  • Shehadeh, Ali & Erdős, Péter & Li, Youwei & Moore, Michael, 2016. "US Dollar Carry Trades in the Era of “Cheap Money”," MPRA Paper 70770, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:70770
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    More about this item

    Keywords

    Commodity Trading Advisors (CTAs); foreign exchange rate; carry trade;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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