The amount of pension savings on which people receive a tax break is to be slashed to less than a fifth of its current level to save £4 billion a year.
The tax-free amount is being cut from £255,000 a year to just £50,000 from April next year.
Accountants predict that the changes will hit more than 500,000 people, including middle-class professionals, savers who choose to pay lump sums into pensions to benefit from tax relief and self-employed businessmen. Some will face demands to pay tens of thousands of pounds in tax as a result.
Financial Secretary to the Treasury Mark Hoban said: "We have ... developed a solution that will help to tackle the deficit but not hit those on low and moderate incomes. We have taken a tough but fair decision.
"The coalition Government believes that our system is fair, will preserve incentives to save and - compared to the last Government's approach - will help UK businesses to attract and retain talent."
It is the latest move by George Osborne, the Chancellor, designed to target higher earners. It follows the controversial decision to strip child benefit from higher-rate taxpayers and allow a rise in university tuition fees. The threshold at which higher-rate tax is payable is also being reduced.
PricewaterhouseCoopers, one of the country's biggest firms of accountants, estimated that the changes would affect more than 500,000 people. "This will affect far more people than anyone imagined," said Marc Hommel, one of its pensions partners.
Tom McPhail, a pensions expert at Hargreaves Lansdown, a wealth manager, said: "Given the tone of the Treasury's thinking, the prospects look even darker for pensioners than initially thought.
"We will certainly see severe restrictions to tax breaks available to pension investors. Particular losers will be middle senior managers in final salary schemes and those people looking to catch up on missed years in pension funding."
Ros Altmann, the director general of the Saga Group, said: “It could hit people on £40,000 a year and they are already being hit by things like child benefit changes. We have to stop targeting that group, the people who just hit the higher tax rate.
“The Government is talking about fairness, but is creating a dangerous cliff edge at this income level. At a higher level, you won’t notice as much, and while £40,000 is higher than average, it is not the very well off.”
Critics say the pension changes will erode the “crumbling foundations” of final salary pension schemes.
The new annual allowance — after which an extra tax charge would be applied — could be exceeded by someone whose pension entitlement in a final salary scheme had risen by just over £2,000 a year.
Thursday, October 14, 2010
Monday, July 19, 2010
Travel cash gets a lot cheaper with Halifax credit card
Halifax has launched a new best-buy credit card that it claims will significantly cut the cost of travel money for holidaymakers.
The Clarity credit card comes with no foreign exchange fees on all transactions, including all purchases anywhere in the world.
It also lets users access cash at foreign ATMs without paying withdrawal fees – although you will be charged interest even if you repay your monthly balance in full.
The rate for cash withdrawals is a low 12.9% APR (typical), which means two-thirds of those that are accepted will get it; the rest pay up to 21.9%.
Customers who have a Halifax Reward current account can apply for the Reward Clarity card and get £5 each month they spend more than £300 on the card.
Alex Higgs, credit card expert at Confused.com, says this offer has come just in time for the big summer getaway.
"Normally, when using a credit card abroad, customers would be charged a cash withdrawal fee and would accrue interest charges from the time of the withdrawal, so the traditional advice has been to use a debit card for cash withdrawals and a credit card for purchases whilst on holiday. The Clarity credit card is not only the cheapest credit card for cash withdrawals abroad but is cheaper than most standard debit cards, which charge £3 or 3% for a cashpoint withdrawal.
"For holidaymakers who need regular access to cash while abroad, this could be a real money-saver, and will help eliminate the need to carry large sums of cash just to save money on fees and charges."
The Clarity credit card comes with no foreign exchange fees on all transactions, including all purchases anywhere in the world.
It also lets users access cash at foreign ATMs without paying withdrawal fees – although you will be charged interest even if you repay your monthly balance in full.
The rate for cash withdrawals is a low 12.9% APR (typical), which means two-thirds of those that are accepted will get it; the rest pay up to 21.9%.
Customers who have a Halifax Reward current account can apply for the Reward Clarity card and get £5 each month they spend more than £300 on the card.
Alex Higgs, credit card expert at Confused.com, says this offer has come just in time for the big summer getaway.
"Normally, when using a credit card abroad, customers would be charged a cash withdrawal fee and would accrue interest charges from the time of the withdrawal, so the traditional advice has been to use a debit card for cash withdrawals and a credit card for purchases whilst on holiday. The Clarity credit card is not only the cheapest credit card for cash withdrawals abroad but is cheaper than most standard debit cards, which charge £3 or 3% for a cashpoint withdrawal.
"For holidaymakers who need regular access to cash while abroad, this could be a real money-saver, and will help eliminate the need to carry large sums of cash just to save money on fees and charges."
Wednesday, June 23, 2010
SAVERS SHOULD TAKE ADVANTAGE OF SHORT-TERM BONUSES
Unless you are prepared to switch your account on a regular basis, you need to look for a provider that offers consistently good rates.
Many providers are using short-term bonuses to lure you in, but their standard rates may be less impressive once the bonus period comes to an end.
"To get the best return from easy-access savings accounts, take advantage of introductory bonuses and guaranteed minimum rates, " says David Black from financial analyst Defaqto. "But move your funds when the introductory bonus or guarantee ends."
Currently, some of the highest rates are offered on fixed-rate bonds.
Aldemore, for example, is paying 3.05 per cent on a one-year bond on a minimum of £1,000, while Northern Rock and Barnsley Building Society are both paying 3 per cent on minimum deposits of £1 and £100 respectively.
ICICI bank is paying 4.15 per cent on a three-year bond on a minimum of £1,000, and the AA is paying 4.1 per cent on a three-year bond from on a minimum of just £1.
If you're happy to lock your money away for five years, ICICI is paying 5 per cent on a minimum investment of £1,000.
"Only invest funds that you won't need for the duration of the fixed-rate period. Early withdrawals tend to be very expensive or not permitted, " says Black.
Black also advises that you keep a close eye on the rate you're getting in an individual savings account (Isa).
SEARCH YOURMONEY for:
"You need to be on your toes with cash Isas and be prepared to transfer to another one if your current deal becomes uncompetitive, " he says.
"But bear in mind that not all cash Isas permit transfers in from other providers."
At present, Nationwide Building Society is paying 2.75 per cent on a minimum of £1 on its Isa which does permit transfers in.
Newcastle Building Society is also paying 2.75 per cent on its Isa which allows transfers in, but this account requires 120 days' notice before you can get access to your cash, and there is a higher minimum deposit of £500.
Many providers are using short-term bonuses to lure you in, but their standard rates may be less impressive once the bonus period comes to an end.
"To get the best return from easy-access savings accounts, take advantage of introductory bonuses and guaranteed minimum rates, " says David Black from financial analyst Defaqto. "But move your funds when the introductory bonus or guarantee ends."
Currently, some of the highest rates are offered on fixed-rate bonds.
Aldemore, for example, is paying 3.05 per cent on a one-year bond on a minimum of £1,000, while Northern Rock and Barnsley Building Society are both paying 3 per cent on minimum deposits of £1 and £100 respectively.
ICICI bank is paying 4.15 per cent on a three-year bond on a minimum of £1,000, and the AA is paying 4.1 per cent on a three-year bond from on a minimum of just £1.
If you're happy to lock your money away for five years, ICICI is paying 5 per cent on a minimum investment of £1,000.
"Only invest funds that you won't need for the duration of the fixed-rate period. Early withdrawals tend to be very expensive or not permitted, " says Black.
Black also advises that you keep a close eye on the rate you're getting in an individual savings account (Isa).
SEARCH YOURMONEY for:
"You need to be on your toes with cash Isas and be prepared to transfer to another one if your current deal becomes uncompetitive, " he says.
"But bear in mind that not all cash Isas permit transfers in from other providers."
At present, Nationwide Building Society is paying 2.75 per cent on a minimum of £1 on its Isa which does permit transfers in.
Newcastle Building Society is also paying 2.75 per cent on its Isa which allows transfers in, but this account requires 120 days' notice before you can get access to your cash, and there is a higher minimum deposit of £500.
Thursday, June 3, 2010
FTSE 100 breaks out of a losing streak on hopes of strong American jobs data
BRITAIN’S top shares snapped out of a three-session losing streak yesterday as hopes of strong jobs data from the US spurred sentiment, sending investors bargain hunting in commodity-linked stocks and banks.
The FTSE 100 ended up 59.86 points, or 1.2 per cent, at 5,211.18, closing at a two-week high but falling back from an intra-day high of 5,262.50.
US President Barack Obama said on Wednesday he believed that the May employment report, due on Friday, would show strong growth in US payrolls.
Weekly US jobs data out yesterday appeared to back up Obama’s upbeat comment.
The number of US workers filing new claims for jobless benefits fell last week, while private employers added jobs in May, further evidence the labour market was improving.
However, a slowdown in new orders received by US factories from March’s surprisingly robust gain convinced investors to lock in some early profits.
“It’s a very volatile situation we are in at the moment and when you have a market which is not unfairly valued and selling off, it tends to attract investors back in,” Peter Dixon, economist at Commerzbank said.
The upbeat sentiment drew punters in off the sidelines, attracting them to stocks which have been hit over the past few days.
Energy stocks were top performers. BP rose 0.5 per cent but fell away from session highs as the oil major’s Gulf of Mexico oil disaster weighed on the stock’s sentiment.
Crude added 0.7 per cent, while BG Group and Royal Dutch Shell gained 1.6 and 1.5 per cent respectively. Oil services firm Petrofac was the top riser, up 5.2 per cent.
The FTSE 100 ended up 59.86 points, or 1.2 per cent, at 5,211.18, closing at a two-week high but falling back from an intra-day high of 5,262.50.
US President Barack Obama said on Wednesday he believed that the May employment report, due on Friday, would show strong growth in US payrolls.
Weekly US jobs data out yesterday appeared to back up Obama’s upbeat comment.
The number of US workers filing new claims for jobless benefits fell last week, while private employers added jobs in May, further evidence the labour market was improving.
However, a slowdown in new orders received by US factories from March’s surprisingly robust gain convinced investors to lock in some early profits.
“It’s a very volatile situation we are in at the moment and when you have a market which is not unfairly valued and selling off, it tends to attract investors back in,” Peter Dixon, economist at Commerzbank said.
The upbeat sentiment drew punters in off the sidelines, attracting them to stocks which have been hit over the past few days.
Energy stocks were top performers. BP rose 0.5 per cent but fell away from session highs as the oil major’s Gulf of Mexico oil disaster weighed on the stock’s sentiment.
Crude added 0.7 per cent, while BG Group and Royal Dutch Shell gained 1.6 and 1.5 per cent respectively. Oil services firm Petrofac was the top riser, up 5.2 per cent.
Tuesday, May 25, 2010
Tax-Free Roth Conversions, for Some
Everyone loves the idea of a Roth IRA. How could you not want the ability to withdraw decades of compounded gains tax-free? If you believe that income tax rates are headed higher, and they definitely are for those in the top brackets, a Roth is even more compelling.
None the less, the single biggest obstacle stopping folks from converting traditional, SEP, or SIMPLE IRA assets to a Roth is the taxes they face. In the year you convert, income tax is due on any amounts that have not yet been taxed. These include annual contributions that you were able to deduct and accrued earnings. (1)
For instance, say you have $100,000 in a traditional IRA: $70,000 represents contributions you made and $30,000 is from the earnings on your IRA investments. Thus, you have never paid income tax on any of the money. If you’re in the 33% income tax bracket and convert half your account- $50,000- you have to come up with $16,500 to cover the additional income tax you’ll owe.
FOX Business Tool: Should I Convert To A Roth IRA?
However, if, like a lot of folks, you lost the ability to deduct your IRA contributions
because your income was too high, then your IRA probably consists of a mixture of pre-tax assets (earnings + deductible contributions) and after-tax assets (non-deductible contributions). Herein lies the opportunity.
video
Obama Admin. Proposes Plan for Mandatory IRAsPlan may hurt small business
related links
The National Bank of Aunt Agnes
Brother, Can You Spare $20,000?
Tough (Financial) Love for Kids
A Tale of Two Social Security Trust Funds
Resist the Urge to Say 'Charge It!' When Paying Your Income Tax Bill
For instance, assume that your traditional IRA breaks down as follows:
Traditional IRA:
Earnings: $30,000
Deductible Contributions: $20,000
Non-deductible Contributions: $50,000
Total: $100,000
If you have a retirement plan such as a 401(k) through your employer, your conversion could be tax free.
First, some background. Federal legislation passed in 2001 introduced the concept of “portability:” the ability to move retirement assets from one type of account to another. Portability is supposed to make it easier to manage and track your nest egg if you’re able to keep it all in one place. So, for instance, if you leave your job at the hospital, you can roll your 403(b) account into the 401(k) offered by your new employer- provided the plan allows this- and vice versa.(2)
The key is that IRAs can also be rolled into company-sponsored retirement plans. However, as Brooklyn, New York CPA Barry Picker points out, “As a matter of law, you can only roll over pre-tax money.”
In the previous example, you have $50,000 of pre-tax money (earnings + deductible contributions) in your traditional IRA. If your employer’s plan accepts rollovers from other retirement plans, you would roll this into your 401(k).
The end result? You now have a traditional IRA holding only $50,000 in after-tax assets. Since you previously paid income tax on this money, you’re not taxed again. The entire $50,000 can be converted to a Roth IRA tax-free.
“We recommend this strategy,” says Picker, of the firm Picker and Auerbach. “It’s an excellent idea.”
1. The “gift” of allowing you to postpone paying income tax on a 2010 Roth conversion is a Trojan horse: if you take the government up on its offer and report half of the taxable portion of your conversion as 2011 income and the remainder as 2012 income, the amount of tax you pay will be based on whatever rates are in effect in those years. If your tax rate is higher, this approach will cost you more
None the less, the single biggest obstacle stopping folks from converting traditional, SEP, or SIMPLE IRA assets to a Roth is the taxes they face. In the year you convert, income tax is due on any amounts that have not yet been taxed. These include annual contributions that you were able to deduct and accrued earnings. (1)
For instance, say you have $100,000 in a traditional IRA: $70,000 represents contributions you made and $30,000 is from the earnings on your IRA investments. Thus, you have never paid income tax on any of the money. If you’re in the 33% income tax bracket and convert half your account- $50,000- you have to come up with $16,500 to cover the additional income tax you’ll owe.
FOX Business Tool: Should I Convert To A Roth IRA?
However, if, like a lot of folks, you lost the ability to deduct your IRA contributions
because your income was too high, then your IRA probably consists of a mixture of pre-tax assets (earnings + deductible contributions) and after-tax assets (non-deductible contributions). Herein lies the opportunity.
video
Obama Admin. Proposes Plan for Mandatory IRAsPlan may hurt small business
related links
The National Bank of Aunt Agnes
Brother, Can You Spare $20,000?
Tough (Financial) Love for Kids
A Tale of Two Social Security Trust Funds
Resist the Urge to Say 'Charge It!' When Paying Your Income Tax Bill
For instance, assume that your traditional IRA breaks down as follows:
Traditional IRA:
Earnings: $30,000
Deductible Contributions: $20,000
Non-deductible Contributions: $50,000
Total: $100,000
If you have a retirement plan such as a 401(k) through your employer, your conversion could be tax free.
First, some background. Federal legislation passed in 2001 introduced the concept of “portability:” the ability to move retirement assets from one type of account to another. Portability is supposed to make it easier to manage and track your nest egg if you’re able to keep it all in one place. So, for instance, if you leave your job at the hospital, you can roll your 403(b) account into the 401(k) offered by your new employer- provided the plan allows this- and vice versa.(2)
The key is that IRAs can also be rolled into company-sponsored retirement plans. However, as Brooklyn, New York CPA Barry Picker points out, “As a matter of law, you can only roll over pre-tax money.”
In the previous example, you have $50,000 of pre-tax money (earnings + deductible contributions) in your traditional IRA. If your employer’s plan accepts rollovers from other retirement plans, you would roll this into your 401(k).
The end result? You now have a traditional IRA holding only $50,000 in after-tax assets. Since you previously paid income tax on this money, you’re not taxed again. The entire $50,000 can be converted to a Roth IRA tax-free.
“We recommend this strategy,” says Picker, of the firm Picker and Auerbach. “It’s an excellent idea.”
1. The “gift” of allowing you to postpone paying income tax on a 2010 Roth conversion is a Trojan horse: if you take the government up on its offer and report half of the taxable portion of your conversion as 2011 income and the remainder as 2012 income, the amount of tax you pay will be based on whatever rates are in effect in those years. If your tax rate is higher, this approach will cost you more
Monday, April 26, 2010
Dollar Strength Grows as Carry Trade Profits Shrink (Update1)
Foreign-exchange profits from carry trades are disappearing as differences in central bank interest rates fail to increase fast enough to compensate for swings in currency rates.
Royal Bank of Scotland Plc’s index tracking the strategy of tapping cash where borrowing costs are low and investing where rates are higher, rose 0.57 percent in the first quarter, the smallest amount in a year, and down from 9.8 percent in all of 2009. Morgan Stanley strategists said in an April 15 research report that the only “functionally attractive” currency to target in carry trades is Australia’s dollar.
Falling demand for carry trades may help the dollar -- a favorite for funding the trades because of record low U.S. rates -- extend a rally that drove it 11 percent higher versus the euro the past six months. Gains of almost 30 percent in Brazil’s real, New Zealand’s dollar and South Africa’s rand the past 12 months suggest they already reflect the prospect of higher rates as central bankers begin to shift monetary policy.
“There is no easy money left in the carry trade,” said Henrik Pedersen, the London-based chief investment officer at Pareto Investment Management Ltd., which oversees $45 billion in currency assets.
“Most of the high-yielding currencies are overvalued and the low-yielders are undervalued,” he said. “The gains you can make on the interest-rate differentials are not going to make you 20 percent a year, it’s probably only going to make you about 2 or 3 percent.”
Central Bank Rates
The dollar rose to the highest in almost three weeks versus the yen today after reports last week showed orders for U.S. durable goods excluding transportation items surged 2.8 percent in March and sales of new homes jumped 26.9 percent, the most in five decades. The greenback strengthened 0.2 percent to 94.24 yen and gained 0.1 percent to $1.3370 per euro.
Measured by Bloomberg Correlation-Weighted Currency indexes, the dollar has gained 1.7 percent this year.
A stronger currency is important to the U.S. because it entices foreign investors to Treasury debt that finances the nation’s record budget deficit. The downside is that it may restrain profit growth at companies with international sales by making U.S. exports more expensive.
Euro Predictions
United Technologies Corp., the Hartford-based maker of Pratt & Whitney jet engines and Black Hawk helicopters, and Providence, Rhode Island-based Textron Inc., which produces Cessna planes, predicted the euro would trade at $1.41 or higher this year.
“The global convergence in yields has basically sidelined the demand for carry,” said Mike Moran, a New York-based senior currency strategist at Standard Chartered Plc. “What has happened over the last 18 months has really leveled the playing field in carry trades. It has driven a convergence in the two most important factors in the carry trade, yields and volatility.”
Carry trades, which flourish most when interest-rate spreads are wide and swings in exchange rates muted, lost 31.5 percent in 2008 as the global financial crisis led to a compression of central bank borrowing costs, before rebounding last year, RBS index data shows.
Coordinated Effort
The Federal Reserve, European Central Bank and four other central banks lowered rates in October 2008 in an unprecedented coordinated effort to ease the effects of the worst financial crisis since the Great Depression.
Central bankers are now preparing rate increases as the global economy recovers. The Reserve Bank of Australia boosted its overnight cash rate to 4.25 percent this month from 3 percent in October. New Zealand’s benchmark rate is 2.5 percent, compared with 0.1 percent in Japan and a range of zero to 0.25 percent in the U.S.
In January 2007, rates were 0.25 percent in Japan, 5.25 percent in the U.S., 6.25 percent in Australia and 7.25 percent in New Zealand.
Investors who took advantage of global rate differentials averaged annual returns of 16 percent from 2000 to 2005, according to the RBS index. The best gains of the decade were in 2002, when the strategy returned 29.3 percent.
At 10.1 percent, three-month implied option volatility for emerging economies is about one percentage point less than for currencies of major industrialized nations, a JPMorgan Chase & Co. index show. In October 2008, emerging volatility was 13 percentage points more.
‘Not Very Attractive’
Higher volatility reduces the allure of carry trades by increasing the probability that swings in exchange rates will erode gains. The JPMorgan option index measuring swings in industrialized nation currencies averaged 7.7 percent in the two years before the subprime-mortgage market collapsed in August 2007.
“The carry trade is not very attractive now, broadly speaking,” said Ronald Leven, a senior currency strategist at Morgan Stanley in New York. “There also is some shifting away from the dollar as a funding currency.”
Leven forecasts the dollar will appreciate to 109 yen and $1.24 per euro by December. Federal fund futures traded on CME Group Inc.’s Chicago Mercantile Exchange show traders place a 56 percent chance the U.S. central bank will lift its target for overnight loans between banks by November.
Greece, Portugal
The dollar has benefitted at the expense of the euro, which has been plagued by concern about the ability of Greece and other European countries such as Portugal and Spain to meet their debt obligations.
Greece asked the European Union and International Monetary Fund on April 23 to activate a lifeline of as much as 45 billion euros ($60.2 billion) in an unprecedented test of the euro’s stability and European political cohesion.
“The alleviating of financing stress in Europe should reduce the risk aversion bid for the dollar that emerged last December and lead markets to return to dollar funding of carry and risk trades,” strategists at Zurich-based Credit Suisse Group AG wrote in an April 13 report.
The company forecast the dollar will weaken to $1.43 per euro and to 92 yen in three months.
The Aussie gained 28 percent against the U.S. dollar and 24 percent versus the Japanese yen in the past 12 months as the RBA began raising rates in October.
Bank of Canada
The Bank of Canada signaled last week it may be the first Group of Seven nation to boost borrowing costs. India raised rates for the second time in a month last week and Sweden’s Riksbank reiterated a forecast to boost its seven-day repurchase rate by the end of the third quarter.
“Regardless of when exactly the Fed raises rates, there is already a waterfall going on in movements of U.S. rates above those in other nations,” said Marc Chandler, head of currency strategy at Brown Brothers Harriman & Co. in New York. Investors “have been paid for being short the U.S. dollar, but that incentive structure is changing,” he said.
The cost of borrowing in yen for three months between banks fell below the dollar rate on March 4 for the first time since August, lessening the appeal of the greenback as a funding currency.
The London interbank offered rate, or Libor, for three- month yen loans was 8.375 basis points less than the dollar rate last week, the most since July. The dollar rate moved below its yen counterpart last year for the first time.
“Ten years ago it was basically the carry trade as a free lunch,” said Maxime Tessier, chief of foreign exchange at Montreal-based Caisse de Depot et Placement du Quebec, Canada’s biggest pension fund manager, with $131.6 billion in assets. “If we are in an environment where risk appetite remains subdued, and questions remain about what will happen with economies and central banks going forward, and if the fiscal crisis we are now seeing will broaden, then this is not the ideal environment for carry.”
Royal Bank of Scotland Plc’s index tracking the strategy of tapping cash where borrowing costs are low and investing where rates are higher, rose 0.57 percent in the first quarter, the smallest amount in a year, and down from 9.8 percent in all of 2009. Morgan Stanley strategists said in an April 15 research report that the only “functionally attractive” currency to target in carry trades is Australia’s dollar.
Falling demand for carry trades may help the dollar -- a favorite for funding the trades because of record low U.S. rates -- extend a rally that drove it 11 percent higher versus the euro the past six months. Gains of almost 30 percent in Brazil’s real, New Zealand’s dollar and South Africa’s rand the past 12 months suggest they already reflect the prospect of higher rates as central bankers begin to shift monetary policy.
“There is no easy money left in the carry trade,” said Henrik Pedersen, the London-based chief investment officer at Pareto Investment Management Ltd., which oversees $45 billion in currency assets.
“Most of the high-yielding currencies are overvalued and the low-yielders are undervalued,” he said. “The gains you can make on the interest-rate differentials are not going to make you 20 percent a year, it’s probably only going to make you about 2 or 3 percent.”
Central Bank Rates
The dollar rose to the highest in almost three weeks versus the yen today after reports last week showed orders for U.S. durable goods excluding transportation items surged 2.8 percent in March and sales of new homes jumped 26.9 percent, the most in five decades. The greenback strengthened 0.2 percent to 94.24 yen and gained 0.1 percent to $1.3370 per euro.
Measured by Bloomberg Correlation-Weighted Currency indexes, the dollar has gained 1.7 percent this year.
A stronger currency is important to the U.S. because it entices foreign investors to Treasury debt that finances the nation’s record budget deficit. The downside is that it may restrain profit growth at companies with international sales by making U.S. exports more expensive.
Euro Predictions
United Technologies Corp., the Hartford-based maker of Pratt & Whitney jet engines and Black Hawk helicopters, and Providence, Rhode Island-based Textron Inc., which produces Cessna planes, predicted the euro would trade at $1.41 or higher this year.
“The global convergence in yields has basically sidelined the demand for carry,” said Mike Moran, a New York-based senior currency strategist at Standard Chartered Plc. “What has happened over the last 18 months has really leveled the playing field in carry trades. It has driven a convergence in the two most important factors in the carry trade, yields and volatility.”
Carry trades, which flourish most when interest-rate spreads are wide and swings in exchange rates muted, lost 31.5 percent in 2008 as the global financial crisis led to a compression of central bank borrowing costs, before rebounding last year, RBS index data shows.
Coordinated Effort
The Federal Reserve, European Central Bank and four other central banks lowered rates in October 2008 in an unprecedented coordinated effort to ease the effects of the worst financial crisis since the Great Depression.
Central bankers are now preparing rate increases as the global economy recovers. The Reserve Bank of Australia boosted its overnight cash rate to 4.25 percent this month from 3 percent in October. New Zealand’s benchmark rate is 2.5 percent, compared with 0.1 percent in Japan and a range of zero to 0.25 percent in the U.S.
In January 2007, rates were 0.25 percent in Japan, 5.25 percent in the U.S., 6.25 percent in Australia and 7.25 percent in New Zealand.
Investors who took advantage of global rate differentials averaged annual returns of 16 percent from 2000 to 2005, according to the RBS index. The best gains of the decade were in 2002, when the strategy returned 29.3 percent.
At 10.1 percent, three-month implied option volatility for emerging economies is about one percentage point less than for currencies of major industrialized nations, a JPMorgan Chase & Co. index show. In October 2008, emerging volatility was 13 percentage points more.
‘Not Very Attractive’
Higher volatility reduces the allure of carry trades by increasing the probability that swings in exchange rates will erode gains. The JPMorgan option index measuring swings in industrialized nation currencies averaged 7.7 percent in the two years before the subprime-mortgage market collapsed in August 2007.
“The carry trade is not very attractive now, broadly speaking,” said Ronald Leven, a senior currency strategist at Morgan Stanley in New York. “There also is some shifting away from the dollar as a funding currency.”
Leven forecasts the dollar will appreciate to 109 yen and $1.24 per euro by December. Federal fund futures traded on CME Group Inc.’s Chicago Mercantile Exchange show traders place a 56 percent chance the U.S. central bank will lift its target for overnight loans between banks by November.
Greece, Portugal
The dollar has benefitted at the expense of the euro, which has been plagued by concern about the ability of Greece and other European countries such as Portugal and Spain to meet their debt obligations.
Greece asked the European Union and International Monetary Fund on April 23 to activate a lifeline of as much as 45 billion euros ($60.2 billion) in an unprecedented test of the euro’s stability and European political cohesion.
“The alleviating of financing stress in Europe should reduce the risk aversion bid for the dollar that emerged last December and lead markets to return to dollar funding of carry and risk trades,” strategists at Zurich-based Credit Suisse Group AG wrote in an April 13 report.
The company forecast the dollar will weaken to $1.43 per euro and to 92 yen in three months.
The Aussie gained 28 percent against the U.S. dollar and 24 percent versus the Japanese yen in the past 12 months as the RBA began raising rates in October.
Bank of Canada
The Bank of Canada signaled last week it may be the first Group of Seven nation to boost borrowing costs. India raised rates for the second time in a month last week and Sweden’s Riksbank reiterated a forecast to boost its seven-day repurchase rate by the end of the third quarter.
“Regardless of when exactly the Fed raises rates, there is already a waterfall going on in movements of U.S. rates above those in other nations,” said Marc Chandler, head of currency strategy at Brown Brothers Harriman & Co. in New York. Investors “have been paid for being short the U.S. dollar, but that incentive structure is changing,” he said.
The cost of borrowing in yen for three months between banks fell below the dollar rate on March 4 for the first time since August, lessening the appeal of the greenback as a funding currency.
The London interbank offered rate, or Libor, for three- month yen loans was 8.375 basis points less than the dollar rate last week, the most since July. The dollar rate moved below its yen counterpart last year for the first time.
“Ten years ago it was basically the carry trade as a free lunch,” said Maxime Tessier, chief of foreign exchange at Montreal-based Caisse de Depot et Placement du Quebec, Canada’s biggest pension fund manager, with $131.6 billion in assets. “If we are in an environment where risk appetite remains subdued, and questions remain about what will happen with economies and central banks going forward, and if the fiscal crisis we are now seeing will broaden, then this is not the ideal environment for carry.”
Tuesday, March 30, 2010
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