“Focusing on the yen carry trade, this paper seeks to determine what factors investors take into account when they choose target currencies. I accomplish this by estimating the relationship between carry trade volume and other economic and nancial variables for nine selected countries in the Asia-Pacic region using a simple multiple regression model. [...]” by Thiti Tosborvorn, Dept. of Economics, Stanford University
Hamlin Lovell, CFA, explores the opportunities of using western currencies as funding currencies for various carry trades as the interest environment remains low.
“Financial repression” is the watchword for this phenomenon, coined by those who perceive governments to be misappropriating returns from savers. But near-zero interest rates may be a double-edged sword for income seekers. That is, although the low interest rates have dramatically curtailed interest income, they have made it cheaper to borrow for funding purchases of higher-yielding assets, or “carry trading. [...]” by Hamlin Lovell, CFA for the CFA Institute
Indepth analysis of the possibilities and available options to measure FX Carry Trade activity.
“Many commentators attribute recent episodes of rapid changes in asset prices to widespread investment in carry trades fueled by low interest rates. While carry trade strategies did not contribute to the recent financial crisis, the disparate monetary policies in place after the height of the crisis—with some central banks pursuing very accommodative policies with low interest rates and others returning to higher rates—may have created an environment where carry trades were attractive. [...]” by Stephanie Curcuru, Clara Vega, Jasper Hoek – Board of Governors of the Federal Reserve System
Professor Moosa explores the risks and return potential of forex Carry Trades and reaches a conclusion as to their viability.
“A consequence of the failure of uncovered interest parity (UIP) is that profit can be made by going short on a low-interest currency (the funding currency) and long on a high-interest currency (the target currency). This is because the failure of UIP means that the target currency does not depreciate against the funding currency by a percentage that wipes out the interest rate differential. [...]” by Imad A. Moosa Chair in Finance, Department of Accounting and Finance, Monash University
The Economist examines the Carry Trade and how traders have been triumphing over economic theory.
“No comment on the financial markets these days is complete without mention of the “carry trade”, the borrowing or selling of currencies with low interest rates and the purchase of currencies with high rates. The trade is often blamed for the weakness of the Japanese yen and the unexpected enthusiasm of investors for the New Zealand and Australian dollars. [...]“
Jeffrey Frankel, formerly a member of President Clinton’s Council of Economic Advisers, is the Harpel Professor of Capital Formation and Growth at Harvard University’s Kennedy School of Government. He wrote this article on the Carry Trade phenomena for the Milken Institute Review.
“About ten years ago the phrase “carry trade” made the leap from investment bank trading rooms to the Markets section of the Wall Street Journal. More recently, readers of high-end financial pages have been treated to assertions that the carry trade is “unwinding,” with consequences galore for international financial markets. My guess, though, is that the notion of the carry trade and its implications are still Greek to all but the most devoted consumers of financial news. If you’d like a translation, read on. [...]” by Jeffrey Frankel for Milken Institute Review
This article approaches the Forex Carry Trade from a technical analysis and suggests certain ground rules aimed to stabilize the trade as a whole, including entry/exit points and risk control.
“For quite some time now, analysts have noisily sounded the death knell for the currency carry trade. These pundits reason that investors have become increasingly risk-averse, that dollar interest rates have progressively lowered within the last year and that interest-rate differentials have generally been decreasing. Therefore, the future for this once-heralded trading strategy appears bleak. [...]” by James Chen for SFO Magazine
Previously part of FXCM´s 30 day Powercourse, the Currency Carry Trade lesson entitled “How, Why and When do Carry Trades Work” in now available for download directly from their website.
“Money is constantly flowing in and out of different markets, driven by the economic law of supply and demand; likewise, markets that offer the highest return per investment will generally attract the most capital. Countries are no different—in the world of international capital flows, nations that offer the highest interest rates will generally attract the most investment and create the most demand for their currencies. [...]” by FXCM Inc.