What Is Yen Carry Trade And What Kind Of Effect It May Have On Your Currency Trading Performance?
Yen carry trade is a way of currency carry trade using the Japanese yen. Carry trade is an trading strategy in which the trader borrows (buys) a currency with a low interest rate and lends (sells) a currency with a high interest rate. Applying this method they may earn profits on the difference between the interest rates.
This kind of investment is popular with financial institutions, central banks and hedge funds, particularly at times when the the worldwide foreign exchange markets are relatively stable and the international stock markets are broadly bullish. In other words, it could be a profitable investment strategy at times of world economic stability and growth.
The Japanese yen is the currency most often taking part in carry trade. This is because over the past years it has continuously been a key currency with the lowest interest rate. The Bank of Japan, which controls Japanese interest rates, has established them at a a very low level since the late 1980s. Often this is below 0.5%.
Actually you would not assume carry trade to be lucrative as the currency rates would change to reflect the discrepancy in interest rates and this would balance out the possible returns. Even so, in practice there is a profit possibility as carry trades have the impact of depreciating the borrowed currency. So yen carry trade keeps the yen artificially low.
Of course there is a risk that the tide will turn but due to the level of control exerted by the Bank of Japan, worldwide confidence is usually quite buoyant. On the other hand, in the case of a significant financial crisis in the USA and the other main economic powers the yield of carry trade is bound to fall.
Certainly where there is a substantial change in currency rates such that the yen rises in value against the lent currencies, it is possible for the investors to lose money when it comes to reversing the scheme. Since there is a large amount of funds involved in yen carry trade it can have a powerful destabilizing impact on the currency markets if market participants suddenly turn away from this kind of investment.
This scenario is known as the unwinding of yen carry trade. It occurs when investors become averse to risk which would probably happen when the yen is soaring against the lent currencies. This could have a significant influence on the value of yen currency crosses. As we saw, yen carry trade weakens the yen so the effect of the unwinding will be to strengthen the yen side of the pair even further.
Yen carry trade is for the most significant players in the international financial markets. It is not something that an independent currency trader would typically expect to get involved in directly. Still, any forex trader involved in a yen pair has to comprehend yen carry trade and its influence on yen prices. Forex signals could be a helpful trading tool to foretell, when the price turns for yen pairs. There are a lot of forex signal services covering yen pairs online. However, make sure that you trade only reliable forex signals!
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