FX Carry Trades Blowing Up

I was just waiting on some of these FX carry trades starting to blow up. Carry traders where putting money into high yield currencies borrowing in low yield currencies hoping to not get hurt by the currency. They would anyway get out in time at least they thought so. The Icelandic krona is a classical example of how carry trades can blow up in your face, within weeks the currency has lost 20% of its value for example against the EURO. In last six month it has gone down by more than 30%. Even with 15% interest rate annually it is very expensive to loose 20% in a few weeks and 30% in some months. Yes for a long time it gave a great Sharpe ratio, and I know for sure some investors increased their bet based on that. If you have any clue about FX carry trades you knew the end would be a blow up, no I did not know when it would blow up, but I strongly try to avoid bets where money likely ticks in slowly, but with a considerably risk could blow up at any time.

This is simply the global credit contraction that no longer simply is a housing and banking problem but is spreading to become a country problem.

I think we could see more FX carry trades blowing up this year, not only FX trades, any carry trade has a high probability of blowing up when credit dries up. Of course there could be times when you should pick up cheap pieces if you have deep enough pockets and low enough leverage, but cheap can get much cheaper. Crowded carry trades are very dangerous in times like this.