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What Is Yen Carry Trade And What Kind Of Impact It Could Have On Your Currency Trading Results?
Yen carry trade is a way of currency carry trade involving 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. In this way they can make profits on the difference between the interest rates.
This kind of investment is widespread among financial institutions, central banks and other large lending institutions, especially at times when the the global foreign exchange markets are relatively stable and the international equity markets are overall bullish. In other words, it could be a successful investment strategy at times of world economic stability and growth.
The Japanese yen is the currency most frequently involved in carry trade. This is because over the past years it has consistently been a primary currency with the lowest interest rate. The Bank of Japan, which controls Japanese interest rates, has established them at a a particularly low level since the late 1980s. Generally this is below 0.5%.
Actually you would not expect carry trade to be profitable because the currency rates would adjust to reflect the discrepancy in interest rates and this would equalize the potential returns. Still, in practice there is a profit potential because carry trades have the influence of depreciating the borrowed currency. So yen carry trade keeps the yen artificially low.
Certainly there is a risk that the trend will turn but due to the level of control exerted by the Bank of Japan, global confidence is typically quite buoyant. However, in the case of a major financial crisis in the USA and the other main economic powers the yield of carry trade is bound to fall.
In fact where there is a considerable change in currency rates such that the yen goes up in value against the lent currencies, it is likely for the investors to lose money when it comes to reversing the position. Since there is a massive amount of money invested in yen carry trade it can have a significant destabilizing influence on the foreign exchange markets if market participants suddenly put aside this type of investment.
This outcome is known as the unwinding of yen carry trade. It happens when investors become averse to risk which is likely to happen when the yen is going up against the lent currencies. This could have a significant influence on the price of yen forex 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 large players in the international money markets. It is not something that a home based forex trader would normally expect to get involved in directly. Still, any forex trader invested in a yen pair has to be aware of yen carry trade and its effect on yen prices. Forex signals could be a useful trading tool to predict, when the trend turns for yen pairs. There are a lot of forex signal services covering yen pairs online. Still, make sure that you trade only reliable forex signals!
What Is Yen Carry Trade And What Kind Of Impact It Could Have On Your Currency Trading Results?
The JPY is the currency most frequently involved in carry trade. This is because over the past years it has consistently been a major currency with the lowest interest rate. The BoJ, which controls Japanese interest rates, has set them at a a very low level.
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