What Does Yen Carry Trade Means And What Type Of Impact It Could Have On Your Forex Trading Performance?

Yen carry trade is a scheme of foreign exchange carry trade using the Japanese yen. Carry trade is an trading strategy in which an investor borrows (buys) a currency with a low interest rate and lends (sells) a currency with a high interest rate. Applying this method they may earn money on the difference between the interest rates.

This type of trading is popular with financial institutions, governments and hedge funds, particularly at times when the the worldwide currency markets are relatively stable and the global financial markets are broadly bullish. In other words, it could be a good investment strategy at times of world economic stability and growth.

The Japanese yen is the currency most often taking part 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 controls Japanese interest rates, has set them at a an extremely low level since the late 1980s. Often this is below 0.5%.

Theoretically you would not assume carry trade to be lucrative as the currency values would change to reflect the difference in interest rates and this would compensate the possible returns. However, in practice there is a profit possibility as carry trades have the influence of weakening the borrowed currency. So yen carry trade keeps 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, global confidence is generally quite buoyant. On the other hand, 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.

In fact where there is a big change in currency 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 position. Since there is a huge amount of funds involved in yen carry trade it can have a powerful destabilizing effect on the currency markets if investors abruptly turn away from this type of investment.

This effect is known as the unwinding of yen carry trade. It occurs when investors become averse to risk which would probably happen when the yen is moving up against the lent currencies. This can have a significant effect on the rates of yen currency 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 big players in the international financial markets. It is not something that an independent currency trader would usually expect to get involved in directly. However, any currency trader involved in a yen pair has to understand yen carry trade and its influence on yen prices. Forex signals could be a helpful trading tool to foretell, when the tide turns for yen pairs. There are plenty of forex signal services covering yen crosses online. However, make sure that you trade only reliable forex signals!

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