The carry trade is imploding
The South African rand just fell almost 5% in an hour. USD/ZAR is at an all time high but the selling may have been sparked by the breakdown in ZAR/JPY as it cracked the September lows.
The news trigger was a switch in finance ministers but that was really just the straw that broke the camel's back.
If you look back at almost every period of significant upheaval in markets, two things happen first:
- The yield curve inverts
- The carry trade breaks down
The first part just isn't going to happen because central banks are buying so many bonds. The second might be happening now.
A 5% drop in a significant global currency is no joking matter.
The way the yen is rallying today is a signal that carry trades are heading for the exits. Aside from ZAR I'd say it's mostly orderly at the moment but when carry trades crack, they can implode.
Keep a very close eye on NZD if the RBZ cuts.
