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Carry Trades Show Limit to Central Bank Stimulus

FX volatility hits five-year low; carry trade profitability has declined.

By Neal Armstrong and Allison Bennett, Bloomberg | Updated on October 22, 2012

The $4 trillion-a-day foreign-exchange market is losing confidence in central banks’ abilities to boost a struggling world economy.

Rather than sparking bets on growth, the JPMorgan Chase & Co. G7 Volatility Index, which more than doubled in 2007 to 2008 before policy makers employed extraordinary measures to address faltering global expansion, has dropped to a five-year low. While small foreign-exchange swings historically favor the strategy of borrowing in low-yielding currencies to buy those with higher returns, a UBS AG index that tracks profits from the so-called carry trade has fallen to the lowest level since 2011.

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