Dealers Unwind Carry Trades As Dollar Rallies

Dealers were unwinding carry trades in which market participants had sold off the U.S. dollar and bought the higher-yielding Mexican peso because the greenback appreciated.

  • 25 Mar 2005
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Dealers were unwinding carry trades in which market participants had sold off the U.S. dollar and bought the higher-yielding Mexican peso because the greenback appreciated. The dollar rallied against the peso last Monday in anticipation of the Federal Reserve Board's interest rate hike to 2.75% from 2.5%, but declined slightly Tuesday after the U.S. Labor Department reported inflation rose by 0.4% from last month.

Traders were chasing the spot market last week, where the dollar rose to about MXP11.22 Monday, up from about MXP10.98 two weeks before, while one-month implied volatility rose to 8.2% from 7%.

Michael Gavin, head of Latin America economic research with UBS Securities in Stamford, Conn., said the U.S. Treasury market was driving the activity, with yield on 10-year Treasury notes rising two weeks ago to almost 4.6% from 4% in early February. Last week yields on the 10-year bonds reached their highest level since June at 4.65%.

A trader said volumes were light due to the upcoming long weekend. The previous week speculative players had boosted volumes through purchasing short-dated dollar calls and peso puts after dealers were caught with short option positions in a strengthening dollar environment.

  • 25 Mar 2005

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5 SG Corporate & Investment Banking 444.17 3 6.24%