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

Yen carry trade is a form of foreign exchange carry trade using the Japanese yen. Carry trade is an investment 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 can earn money on the disparity between the interest rates.

This type of trading is popular with banks, central banks and hedge funds, especially at times when the the worldwide currency markets are relatively solid and the global financial markets are broadly bullish. In other words, it can be a successful investment strategy at times of world economic stability and growth.

The Japanese yen is the currency most commonly involved 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 set them at a an extremely low level since the late 1980s. Often this is under 0.5%.

Actually you would not count on carry trade to be profitable as the currency values would correct to reflect the difference in interest rates and this would compensate the possible profits. Still, in practice there is a profit opportunity because carry trades have the influence of weakening the borrowed currency. So yen carry trade maintains the yen artificially weakened.

Obviously there is a risk that the tide will turn but due to the level of control exerted by the Bank of Japan, worldwide confidence is typically quite buoyant. On the contrary, in the case of a major financial crisis in the USA and the other main economic powers the yield of carry trade is bound to fall.

In fact where there is a big change in foreign exchange values 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 scheme. Since there is a massive amount of capital invested in yen carry trade it can have a powerful destabilizing effect on the financial markets if investors abruptly turn away from this kind of investment.

This outcome is known as the unwinding of yen carry trade. It occurs when investors become averse to risk which is likely to happen when the yen is moving up against the lent currencies. This can have a powerful effect on the rates 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 large players in the international financial markets. It is not something that a home based currency trader would usually expect to get engaged in directly. However, any currency trader involved in a yen pair needs to be aware of yen carry trade and its impact on yen prices. Forex signals could be a useful trading tool to foretell, when the tide turns for yen crosses. There are plenty of forex signal services covering yen crosses online. However, make sure that you trade only reliable forex signals!

What Is Yen Carry Trade And What Type Of Effect It May Have On Your Forex Trading Success?
The JPY is the currency most frequently involved in carry trade. This is because over the past years it has consistently been a major currency with the lowest interest rate. The BoJ, which controls Japanese interest rates, has set them at a a very low level.

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