What Is Yen Carry Trade And What Kind Of Influence It Could Have On Your Forex Trading Performance?
Yen carry trade is a way of foreign exchange 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 money on the disparity between the interest rates.This kind of trading is popular with financial institutions, central banks and hedge funds, particularly at times when the the worldwide currency markets are relatively solid and the international equity markets are broadly 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 often taking part in carry trade. This is because over the past years it has continuously been a major currency with the lowest interest rate. The Bank of Japan, which manages Japanese interest rates, has established them at a a particularly 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 values would adjust to reflect the discrepancy in interest rates and this would equalize the possible returns. Still, in practice there is a profit possibility as carry trades have the impact of weakening the borrowed currency. So yen carry trade maintains the yen artificially low.
Obviously there is a risk that the tide will turn but due to the level of control exerted by the Bank of Japan, global confidence is typically 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 big change in foreign exchange rates such that the yen soars in value against the lent currencies, it is possible for the investors to lose money when it comes to reversing the position. Since there is a massive amount of funds involved in yen carry trade it can have a powerful destabilizing effect on the forex markets if market participants abruptly turn away from this type of investment.
This outcome 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 can have a powerful influence on the rates 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 large players in the international financial markets. It is not something that an individual currency trader would usually expect to get engaged in directly. Still, any currency trader involved in a yen pair has to be aware of yen carry trade and its influence on yen prices. Forex signals could be a valuable trading tool to foretell, when the tide turns for yen crosses. There are a lot of forex signal services covering yen crosses online. However, make sure that you trade only reliable forex signals!
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