Hello, I would like to see if I have understood some details regarding the carry trade correctly - it's regarding how capital flows, stock and bondmarkets relate and intertwine, for example in the case of an unexpected hike of rates in a country with an already highyielding currency.
If interest rates in country A are low, and interest rates in country B are high, then investors will (if they're willing to take on risk, ie. "risk appetite" is high), then they might borrow funds in county A and place them in bonds in country B. This will tend to push the value of currency B higher - and currency B should be taken higher immediately if an unexpected hike in rates is announced.
Now, this fits well with bonds.
Regarding stocks, an unexpected rate-hike is normally negative - I believe - do you agree with me on that? (Higher rates: higher borrowing costs for companies and thus lower expectations to future earnings of the various companies. (Also, from a theoretical view-point, higher rates means that future earnings are being discounted at a higher rate to find the correct value of a share)
Now - these two effects seem to be working against eachother in the case of an unexpected hike in rates in country B. Capital would FLEE the stock market, and ENTER the bond market.
In most countries, the BOND markets are much larger than the STOCK markets - I believe - do we agree that this is generally true? As far as I know, this is true of USA, Japan, UK, EU and most other economic areas.
Do you agree with my description of how these mechanisms work together?
Can you think of any countries where stockmarkets are larger than bond markets - and does the currency of that country behave "oddly" somehow?
Not sure how well formulted the quesiton is - really, I'm just looking for someone who can give me some insight in how capital flows in and out of stock and bondmarkets are connected to currency values.
Thanks a lot for any comments/answers!
If interest rates in country A are low, and interest rates in country B are high, then investors will (if they're willing to take on risk, ie. "risk appetite" is high), then they might borrow funds in county A and place them in bonds in country B. This will tend to push the value of currency B higher - and currency B should be taken higher immediately if an unexpected hike in rates is announced.
Now, this fits well with bonds.
Regarding stocks, an unexpected rate-hike is normally negative - I believe - do you agree with me on that? (Higher rates: higher borrowing costs for companies and thus lower expectations to future earnings of the various companies. (Also, from a theoretical view-point, higher rates means that future earnings are being discounted at a higher rate to find the correct value of a share)
Now - these two effects seem to be working against eachother in the case of an unexpected hike in rates in country B. Capital would FLEE the stock market, and ENTER the bond market.
In most countries, the BOND markets are much larger than the STOCK markets - I believe - do we agree that this is generally true? As far as I know, this is true of USA, Japan, UK, EU and most other economic areas.
Do you agree with my description of how these mechanisms work together?
Can you think of any countries where stockmarkets are larger than bond markets - and does the currency of that country behave "oddly" somehow?
Not sure how well formulted the quesiton is - really, I'm just looking for someone who can give me some insight in how capital flows in and out of stock and bondmarkets are connected to currency values.
Thanks a lot for any comments/answers!