Tuesday, 8 September 2009

G20's renewed commitment to ZIRP and S&P enthusiasts cannot both be right.

Ultimately the G20 cannot be right in continuing to argue for ZIRP if equity traders are right in discounting such a rosy scenario. One of those two perceptions is wrong and one side will have to change its position.

1. If ZIRP goes so may the enthusiasm for the recovery.

2. If equities go then all those using the new carry trade of being short the USD and long the Australian dollar etc. may find a real shortage of buyers for the long leg of their carry trade bets if there is a fast unwind as was seen in July/August of 08.

I lean towards the view that equities have already priced in the recovery or they've priced in too rosy a recovery and a lot of those over-stretched currency positions which are essentially short dollars could snap back rather rapidly.

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