What Is Yen Carry Trade And What Type Of Effect It Can Have On Your Currency Trading Success?

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What Is Yen Carry Trade And What Type Of Effect It Can Have On Your Currency Trading Success?

Yen carry trade is a form of currency carry trade involving the Japanese yen. Carry trade is an investment strategy in which an investor borrows (buys) a currency with a low interest rate and lends (sells) a currency with a high interest rate. Applying this method they may make money on the disparity between the interest rates.

This type of investment is widespread among banks, governments and hedge funds, particularly at times when the the global currency markets are relatively solid and the global stock markets are overall bullish. In other words, it can be a good 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 consistently been a major currency with the lowest interest rate. The Bank of Japan, which manages Japanese interest rates, has set them at a a very low level since the late 1980s. Generally this is under 0.5%.

Theoretically you would not assume carry trade to be lucrative because the currency values would correct to reflect the difference in interest rates and this would balance out the potential profits. However, in practice there is a profit possibility as carry trades have the effect of weakening the borrowed currency. So yen carry trade maintains the yen artificially weakened.

Certainly there is a risk that the trend will turn but due to the level of control exerted by the Bank of Japan, international confidence is generally 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.

Indeed where there is a big change in foreign exchange values 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 investment. Since there is a huge amount of funds involved in yen carry trade it can have a significant destabilizing effect on the financial markets if investors suddenly put aside this form of investment.

This effect 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 strengthening against the lent currencies. This can have a powerful effect on the price of yen forex pairs. 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 big players in the international financial markets. It is not something that an individual forex trader would usually expect to get engaged in directly. However, any forex trader invested in a yen pair needs to understand yen carry trade and its influence on yen prices. Forex signals could be a valuable trading tool to predict, when the tide turns for yen crosses. There are plenty of forex signal services covering yen pairs online. Still, make sure that you trade only reliable forex signals!

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