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

Ali Shehadeh, Péter Erdős, Youwei Li, Michael Moore

Research output: Contribution to journalArticle

2 Citations (Scopus)
392 Downloads (Pure)

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.
Original languageEnglish
Pages (from-to)374-404
Number of pages31
JournalCzech Journal of Economics and Finance
Volume66
Issue number5
Early online date15 Oct 2016
Publication statusPublished - 2016

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