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


Yen carry trade is a method of foreign exchange carry trade involving the Japanese yen. Carry trade is an trading strategy in which the trader borrows (buys) a currency with a low interest rate and lends (sells) a currency with a high interest rate. In this way they can earn profits on the disparity between the interest rates.

This form of trading is widespread among financial institutions, central banks and other large lending institutions, especially at times when the the worldwide foreign exchange markets are relatively solid and the worldwide equity markets are overall bullish. In other words, it could be a profitable investment strategy at times of world economic stability and growth.

The Japanese yen is the currency most frequently involved in carry trade. This is because over the past years it has continuously been a primary currency with the lowest interest rate. The Bank of Japan, which manages Japanese interest rates, has determined them at a a particularly low level since the late 1980s. Generally this is below 0.5%.

Actually you would not expect carry trade to be profitable as the currency rates would correct to reflect the discrepancy in interest rates and this would equalize the potential returns. Even so, in practice there is a profit potential because carry trades have the impact of depreciating the borrowed currency. So yen carry trade maintains the yen artificially low.

Obviously there is a risk that the trend will turn but due to the level of control exerted by the Bank of Japan, global confidence is usually quite buoyant. However, 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.

Certainly where there is a substantial change in foreign exchange rates such that the yen soars in value against the lent currencies, it is likely for the investors to lose money when it comes to reversing the position. Since there is a large amount of money invested in yen carry trade it can have a powerful destabilizing impact on the financial markets if market players abruptly put aside this type of investment.

This scenario is known as the unwinding of yen carry trade. It happens when investors become averse to risk which is likely to happen when the yen is soaring against the lent currencies. This could have a powerful impact on the rates of yen forex crosses. 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 most significant players in the international money markets. It is not something that a home based currency trader would typically expect to get engaged in directly. Still, any currency trader invested in a yen pair has to comprehend yen carry trade and its effect on yen prices. Forex signals could be a useful trading tool to foretell, when the price turns for yen crosses. There are a lot of forex signal services covering yen crosses online. Still, make sure that you trade only reliable forex signals!

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