Exact mechanism of carry trade on asset pricing in receiving country?

Hi there,





I'm familiar with the mechanism of carry trade operations on foreign exchange markets. However, what I'm struggling with is understanding the EXACT causal chain on how it affects asset pricing in a receiving country.





For example, you have an economy with some fixed M3, say A$100. Now you have a speculator which is willing to buy local assets by selling his B$10 and buying some equivalent amount in $A, say A$10. Hence it's an open market transaction no extra money will be created in the economy, the money will just swap hands. Now the speculator heads off, say, to the stock market and buys $A10 worth of stock. But then why would it increase asset pricing in the local economy? After all the previous owner of this money had to unload his holdings before exchanging $A to $B. Seems to be a no effect situation?





Do I miss something?





Does it have a more complex mechanism I might be missing?|||Your example is not a carry trade to start with. (Or maybe I misunderstood your explanation.)





A carry trade uses the existence of price or rate differences in two countries, for instance different interest rates in Japan and the US. As this is an arbitrage the situation is not stable: either the interest rates or more likely the exchange rates will change if the carry trades make up a large part of the transactions.