This has probably been answered before, or may be common knowledge to most people here, but I don't quite understand why there is such a precise correlation between carry trade currency pairs (such as GBP/JPY) and global equity markets?
As I understand, the main point of a carry trade is earn the interest differential between two currencies, and also increase the capital due to the appreciation of the high-yielding currency.
The interest rate differential won't go away overnight even if stock markets suffer a big collapse, so why are carry traders pulling out so quickly? Is it just a psychological effect that things are unstable, or are there more profound reasons?
As I understand, the main point of a carry trade is earn the interest differential between two currencies, and also increase the capital due to the appreciation of the high-yielding currency.
The interest rate differential won't go away overnight even if stock markets suffer a big collapse, so why are carry traders pulling out so quickly? Is it just a psychological effect that things are unstable, or are there more profound reasons?