Central Banks: Power of the carry trade is not to be underestimated - SocGen

Research Team at Societe Generale, notes that the Bank of Japan left rates on hold, choosing instead to tinker around by announcing its intention to keep the 10-year JGB yield near current levels.

Key Quotes

“The FOMC also left rates on hold, by a 7-3 vote, the minority wanting to raise rates. The Fed’s estimate of where rates are going over the longer term came down but remains well above market pricing, and the overall tone of the FOMC statement was, at the margin, more upbeat than in June. They want us to expect a December hike. We, collectively, have raised the probability of a December move to 60% but have if anything tapered back on how much the Fed does after that. The 10-year Treasury yield is lower and, more importantly for the way I look at the FX market currently, the 10-year TIIPs yield is also lower.

The rates market reaction to the two marquee events of the week helps explain the FX moves but doesn’t tell us much about how to position going forwards beyond reminding us, yet again, that the power of the carry trade is not to be underestimated. Years of low rates have left investors addicted to assets with yield.”