Carry Trading Explained by Example
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Anyone with a little experience in the world of currency trading is familiar with the impact that Central Bank Interest rates have on currency prices, and we are told to pay as much attention to this as possible so as to keep informed on all factors shaping exchange rates across the board. When reading about anything to do with FX and interest rates, you will find commentary on one aspect called the Carry Trade which is something I have been getting many questions about lately.
The Carry Trade has typically been a trading strategy carry trade strategy forex by major investors and institutions to greatly increase the rate of return or yield which they are getting on their money. As we know, Carry trade strategy forex Banks around the globe have the power to change their interest rates regularly through economic policy. The higher the rate are, the more attractive the currency is to the outside investors.
The lower those rates are, the less likely people are to hold their money in that currency. The difference between worldwide carry trade strategy forex is dependent on the policies of the Central Banks themselves and varies from carry trade strategy forex to nation, with some being much higher or lower than carry trade strategy forex at any given time.
So how would an investor take advantage of this? A good example would be to focus on a currency like the Japanese Yen. Traditionally, the Yen has held lower rates than most other currencies, mainly since the Japanese Bank wants to maintain a cheaper currency which in turn means that it is more affordable for carry trade strategy forex nations to buy Japanese exports.
As we know, Japan is built on exports so a weaker Yen works nicely in their favor. Due to these factors, the Carry Trade evolved into a strategy where investors could borrow one currency with a low rate attached to it, like the Yen and then sell to buy or invest in another higher yielding currency like the British Pound, Euro and even the USD itself.
As a result of the carry, we would see carry trade strategy forex term trends develop over the years as more people would borrow and sell Yen to buy stronger currencies and get paid what we call the rate carry trade strategy forex.
As well as recovering this differential, the investor would also gain from the change in rates. When things are doing well in global markets, investors tend to build up a higher appetite for risk and are happy to use their profits to attempt strategies like the carry trade.
However, as we saw when the Credit Crunch reared its ugly head inall good things come to an end and the carry trade unwound in spectacular fashion:. As you can see, overall market sentiment will change very quickly, sharply adjusting the supply and demand for markets in the blink of an eye. A keen eye will notice a unique change in the dynamic of the carry trade when looking at the charts above. While both markets enjoyed a dual recovery inthings tailed off by for the GBPJPY which continued its downward descent, yet the Stock Markets continued to rally without pause.
The reason why is simple: However, there was still a bit of room for the carry trade to work but to carry trade strategy forex lesser degree, this time with the rare few nations who did raise rates over the last few years, namely Australia and New Zealand. Looking at the time of writing this article, New Zealand has the highest rates of the major currencies at 1. What does this look like on a chart then?
Maybe a sign that the smart money is not as trusting of the new equity market highs as much of the media is? All I know is that I will personally be keeping an eye on this currency pair in the coming months as I would expect much available downside opportunity if or when stocks do decide to correct.
There is still a Carry Trade out there guys, you just have to look a little harder to find it these days. Disclaimer This newsletter is written for educational carry trade strategy forex only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever.
Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter.
Future results can be dramatically different from the opinions expressed herein. Past performance does not carry trade strategy forex future results. Reprints allowed for private reading only, for all else, please obtain permission.