US Dollar Carry Trades in the Era of 'Cheap Money'

34 Pages Posted: 18 Apr 2016

See all articles by Ali Shehadeh

Ali Shehadeh

Queen's University Belfast - Finance

Péter Erdős

RPM Risk & Portfolio Management AB, Stockholm, Sweden

Youwei Li

Hull University Business School

Michael Moore

University of Warwick - Warwick Business School

Date Written: April 10, 2016

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.

Keywords: Commodity Trading Advisors (CTAs), Foreign Exchange Rate, Carry Trade

JEL Classification: F31, G11, G15

Suggested Citation

Shehadeh, Ali and Erdős, Péter and Li, Youwei and Moore, Michael John, US Dollar Carry Trades in the Era of 'Cheap Money' (April 10, 2016). Available at SSRN: https://ssrn.com/abstract=2765552 or http://dx.doi.org/10.2139/ssrn.2765552

Ali Shehadeh

Queen's University Belfast - Finance ( email )

United Kingdom

Péter Erdős

RPM Risk & Portfolio Management AB, Stockholm, Sweden ( email )

Stureplan 15
SE-111 45 Stockholm
Sweden

Youwei Li (Contact Author)

Hull University Business School ( email )

University of Hull
Hull, HU6 7RX
United Kingdom

Michael John Moore

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

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