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What Is Yen Carry Trade And What Type Of Impact It Can Have On Your Forex Trading Performance?
Yen carry trade is a method of foreign exchange carry trade using 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. In this way they may earn profits on the disparity between the interest rates.
This form of trading is popular with banks, governments and other large lending institutions, particularly at times when the the worldwide foreign exchange markets are relatively solid and the worldwide financial markets are broadly 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 frequently taking part in carry trade. This is because over the past years it has continuously been a key currency with the lowest interest rate. The Bank of Japan, which manages Japanese interest rates, has determined them at a an extremely low level since the late 1980s. Often this is under 0.5%.
Theoretically you would not expect carry trade to be lucrative as the currency rates would correct to reflect the discrepancy in interest rates and this would compensate the possible profits. However, in practice there is a profit potential as carry trades have the impact of depreciating the borrowed currency. So yen carry trade maintains the yen artificially low.
Needless to say there is a risk that the tide will turn but due to the level of control exerted by the Bank of Japan, international confidence is generally quite buoyant. However, 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 substantial change in foreign exchange rates such that the yen surges in value against the lent currencies, it is possible for the investors to lose money when it comes to reversing the investment. Since there is a huge amount of money involved in yen carry trade it can have a powerful destabilizing impact on the financial markets if market players abruptly turn away from this form of investment.
This effect is known as the unwinding of yen carry trade. It happens when investors become averse to risk which would probably happen when the yen is moving up against the lent currencies. This could have a powerful impact on the quotes of yen currency 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 money markets. It is not something that an independent currency trader would typically expect to get engaged in directly. Still, any currency trader involved in a yen pair needs to understand yen carry trade and its effect on yen prices. Forex signals could be a helpful trading tool to foretell, when the price 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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