Forex carry trade, after months of obscurity, is making a come back. For those who forgot what it was, carry trade involves borrowing(selling) low interest currencies and buying higher paying ones. Idea is to collect the interest rate differential, on top of price appreciation which this action is expected to bring. For many years Japanese Yen has been the center of attention when it came to the carry trade. Couple of decades of cheap money(abysmal interest rates) led to using JPY as financing mechanism for all kinds of speculative investments. In the end, it all came crushing down last year, an event, or process, known as the “unwind” of the carry trade. During those few months, in tandem with global financial panic, Yen rose to dizzying levels, in some cases registering all time highs. In response, all central banks embarked on interest cutting campaign, putting an end to the carry trade. It fell dormant.
Now that the economy stabilized and central banks are no longer taking new active easing steps, the carry trade is making its way back to spotlight. Granted, the rate differentials are much smaller than they used to be, but they exist. Also, money appears to be flowing into currencies of economies most likely to be first to start raising its benchmarks, such as Australia or New Zealand. This has been already recognized by RBNZ, as one of the reasons for NZD’s recent surge. What has changed is the source of financing for this resurrected activity. Its no longer the Japanese Yen, but the US Dollar. This time around its FED, that fuels insatiable appetite for cheap money. Three months dollar based LIBOR dropped to 0.292%, while similar Yen based instrument is at 0.352%. It is cheaper to borrow dollar. Speculators see it and try to take advantage of. It is hard to say if this particular trend will last but conditions seem ripe for continuation, especially if FED stays with low rates policy.
More on the new
Forex carry trade. 
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October 2nd, 2009, 12:21 PM
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