Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Back From The Dead? The Revival Of The FX Carry Trade

By Forex.com (Matthew Weller)CurrenciesMay 11, 2022 06:14
uk.investing.com/analysis/back-from-the-dead-the-revival-of-the-fx-carry-trade-200518402
Back From The Dead? The Revival Of The FX Carry Trade
By Forex.com (Matthew Weller)   |  May 11, 2022 06:14
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

Back in the day, people used to joke that bankers followed the 3-6-3 rule: They borrowed money (deposits) at 3%, lent them out (through mortgages and other loans) at 6%, and were on the golf course by 3 o’clock in the afternoon.

While the banking industry has evolved dramatically in recent decades, the appeal of relatively effortlessly earning an interest rate spread between the cost of money on borrowed funds and the return on lending out that same money is timeless.

Enter the FX carry trade.

What is the FX carry trade?

As we outlined in our educational article on the topic, “a carry trade is a trading strategy that involves borrowing a low-yield (low interest rate) currency to buy a higher-yield (high interest rate) currency in order to profit from the difference in interest rates.”

Prior to the Great Financial Crisis (GFC), this was one of the most popular FX trading strategies on the planet, with many traders selling currencies with lower interest rates, like the Japanese yen, and buying currencies with relatively high interest rates, like the Australian dollar or even more exotic EM currencies like the Turkish lira.

Even if the difference between the relevant rollover rates, say on AUD/JPY, were only 2.00%, by incorporating leverage, traders were able to collect sizable annualized interest rates.

If the AUD/JPY exchange rate also rose, the carry trade would be even more profitable, though it’s worth emphasizing that a decline in the exchange rate could offset any profits or even lead to outright losses despite the positive carry.

Is the FX carry trade back?

The popularity of the FX carry trade took a big hit when most global central banks drove interest rates to essentially 0% in the aftermath of the GFC, but as inflation rises to multi-decade highs, some central banks are once again raising interest rates aggressively, suggesting that the carry trade could come back from the dead in the coming months.

For example, traders expect the Federal Reserve to raise the fed funds target rate to nearly 2.00% by July and nearly 3.00% by the end of the year, whereas the BOJ is still aggressively intervening into Japan’s bond markets to ensure that interest rates on the 10-year JGB do not exceed 0.25%.

In other words, the “gap” between the Fed and BOJ’s primary interest rates will likely exceed 2.00% in the latter half of this year, providing notable positive carry on a long USD/JPY position, especially when accounting for the potential leverage on the trade.

As the chart below shows, many traders have already been pricing in the positive carry potential with the pair, and USD/JPY has tacked on about 1,500 pips in the last two months alone.

USD/JPY Daily Chart
USD/JPY Daily Chart

Source: TradingView, StoneX

For anyone considering placing a carry trade on USD/JPY, it is essential to monitor the price action in the underlying exchange rate, as a decline of just 2% (or about 250 pips in this case) could wipe out an entire year’s worth of interest.

But, as long as the pair remains well supported (or even rises further), the newly-rediscovered potential for positive carry in the FX market can provide a tailwind when trading certain pairs.

Original Post

Back From The Dead? The Revival Of The FX Carry Trade
 

Related Articles

Back From The Dead? The Revival Of The FX Carry Trade

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (2)
som sithy
som sithy May 11, 2022 21:32
Saved. See Saved Items.
This comment has already been saved in your Saved Items
hello
som sithy
som sithy May 11, 2022 21:32
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Give me information on the price of gold's ok l buy to meet the risk.
Richard Collinson
Richard Collinson May 11, 2022 7:40
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Very interesting
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email